Bear Stearns today - COVD: "Compelling Buying Opportunity"
BEAR, STEARNS & CO. INC.
EQUITY RESEARCH
Covad Communications Group Inc.* (COVD $9 29/32) - Buy
Covad Presents A Very Compelling Buying Opportunity
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Key Points
*** Covad Will Meet And/Or Exceed Analyst Expectations For The Third Quarter.
*** Recent Investment Commitment From SBC Cement Relationship With Covad.
*** Completion Of $500 Million Convertible Offering Funds Covad Through 1Q02.
*** We Reiterate Our BUY Rating On Covad Communications Group.
INVESTMENT VIEWPOINT-
We are reiterating our BUY rating on Covad Communications Group following what we believe is a brutal and unwarranted
sell off in the company's stock over the
past week. While we expected that this year's "tax loss selling season" would be particularly unpleasant for the CLECs,
we have a very hard time understanding the recent price action in the stock - especially in light of the
string of very positive announcements that the company has issued lately. We note that in just the past 4 weeks Covad has
announced that it will exceed Street expectations for 3Q00 and the full year, put in place $650 million in
new financing that will take it into 1Q02, and signed a strategic agreement with SBC Communications that will guarantee
it $600 million in revenue over a period of 6 years. We would like to take this opportunity to address the central tenets of
our "bull" case for Covad:
Covad announced on September 11, 2000 that it will have 200,000 DSL lines in service by the end of 3Q00 - about 30%
above our original estimates for the quarter. We note that the company will attain these superb operational results despite
the impact of the Verizon strike. We believe that without the impact of the Verizon strike, Covad could have added an
additional 10 to 15 thousand
lines in 3Q00.
We believe that the demand for Covad's broadband DSL access remains robust and that the company is generating
orders for its service at an accelerating pace. We remind investors that broadband penetration of the nation's 80 million
homes and businesses that are connected to the internet has grown rapidly to 6% and is likely to reach double-digit
penetration rates in the near term.
Covad announced on September 11, 2000, that SBC Communications agreed to invest $150 million in Covad and made
Covad its preferred provider of in-region and
out-of-region provider for DSL services. Along with this agreement, SBC
guaranteed $600 million in revenue for Covad over the next 6 years, starting
October 1, 2000. Covad will provide DSL services for SBC's business and
consumer customers.
Third, on September 20, 2000, Covad completed a $500 million Convertible Senior
Notes offering. Pro forma for this offering and the SBC investment, as of
2Q00, Covad has $1.5 billion in cash and available securities on its balance
sheet, or about $7.40 in cash per share. With a projected cash burn of about
$70 million per month, this cash and liquidity position effectively funds Covad
through 1Q02.
In addition to these announcements, Covad has provided new guidance to the
Street, which provides incremental upside to our financial model on the
company. Covad raised its year 2000 and 2001 line targets to near pre-BlueStar
levels. We now have a year-end DSL line target of 270,000 lines, up from our
earlier target of 245,000 lines, and we have increased our 2001E revenue target
to $580 million from $560 million.
We view the October 3, 2000 announcement that Comdisco will shut down its DSL subsidiary - Prism - as a net positive
for Covad. The termination of Prism and
the ongoing shakeout of the weaker players in the DSL space should establish an environment that is beneficial to the
DSL industry leaders |
