VERT UPGRADE !! Makes Goldman Sachs Recommended List !!
* * FULL ACTION in the A.M. - U.S. * *
New York Investment Research (New York) - - Investment Research
===================== NOTE 7:33 AM July 17, 2000 ======================
2. VerticalNet, Inc. (VERT) $51.13
Jamie Friedman 1 650 234-3341
EPS (FY Dec): 2000E US$-0.89, 2001E US$0.06 - Reccomended List
* UPGRADING VERTICALNET TO RECOMMENDED LIST. Over the last 6 months VERT
entered into a new line of business (electronic component trading), for
which we believe the Street has yet to give them credit. This has
created a hidden asset whose value we believe will surface over time. In
addition, VERT's core business is ramping faster than expected. We
toured VERT facilities recently and believe the storefront business
(w/MSFT support) is ramping ahead of expectations. Simultaenously VERT
is winning a seat at the table with both tech cos and consortia that
should lift the stock. Due to the hidden value of the exchange, and the
strength in the underlying business, we are raising our rating to RL,
price target $75.
* MAKING MARKETS WERE THERE WERE NO MARKETS. VERT'S GLOBAL ELECTRONICS
EXCHANGE IS A HIDDEN ASSET. In the last 6 months, VerticalNet has
acquired 3 electronic component and hardware exchanges, New England
Chip Exchange (NECX, 12/16/99), Real World Electronics (RWE, 2/22/00),
and American Integrated Circuit Exchange (AICE, 7/7/00). Proforma for
the acquisitions, we estimate 40-50% of VerticalNet's revs in the next
12 months will come from its chip exchanges. Moreover, VerticalNet will
now have $800M of the domestic chip spot market of $8B, or ~10%. Under
one fold, these three companies (NECX, RWE and AICE) will earn a higher
seat at the table, creating an increasingly powerful force in the tech
marketplace. We believe this increased concentration warrants a
reappraisal of the valuation of the VERT shares.
* WHAT ARE THE COMPARABLE COMPANIES AMONG B2B EXCHANGES? As described
above, VERT is emerging as a principal market maker in electronic
components. We believe that this new electronics exchange business
commands a premium to Vert's underlying business, which argues for a
multiple expansion. There is no perfect comparable public company to
this business, but we believe an appropriate universe includes Enron
(covered by David Fleischer, principal market maker in oil and gas and
bandwidth), Consumer Electronics (covered by David Abraham, is a German
company who has a chip exchange similar to VerticalNet), Universal
Access (which I also co-cover, is a market maker in bandwidth). While we
recognize that none of these is a perfect comparable, we believe that
the mix of companies can be illustrative when valuing VerticalNet's chip
business.Performing a detailed analysis on the valuation of the
Electronics Exchange as a standalone business suggests the Street is
failing to recognize its full value. The multiple of 2000 and 2001 for
the comparable exchange business includes 45 and 25 times for Enron, 101
and 37 times for Universal Access, and 35 and 20 times for Consumer
Electronics. This yields an average of approximately 54 and 27 times
2000 and 2001, respectively. For a variety of reasons (discussed in the
risks section), we believe that the VerticalNet Electronics Exchange
should trade at a discount to these comparable companies. Even so, we
think that the VerticalNet Electronics Exchange is worth between $1.5B
and $2.5B. We also reconfirm this analysis of the Electronics Exchange
business with a DCF analysis. Using conservative assumptions regarding
growth rates (we condition for cyclicality), gross and operating margins
(<11% and ~35% of gross revs, resp), and discount rates 11%, and a
terminal year multiple of 20 times, we believe this business is worth a
minimum of $1B.
* SO WHAT ARE THE VERTICALNET SHARES WORTH? VerticalNet as a whole trades
at 22 and 12 times 2000 and 2001 revenues, respectively. VerticalNet
has three distinct lines of business; storefronts (with content-like
characteristics), exchanges and e-commerce. To better evaluate the Vert
shares we analyze the competitors in each area of business and their
respective revenue multiples. For the content group we used CNET and
ZDNet, which trade at roughly 9 and 6 times sales for 2000 and 2001. We
believe that Vert's content business is worth a minimum of $1.4B.
Important Disclosures (code definitions attached or available upon request)
VERT : CF
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