Vik releases new report:
PSINET, INC. (PSIX $2 11/32)
RATING: LOWERED TO BUY FROM STRONG BUY
PRICE TARGET: LOWERED TO $20 FROM $57
FEAR FEEDING FEAR – LEMMINGS IN FULL STAMPEDE
www.psinet.com/network/connectivitymaps.html
For the record, we were surprised and disappointed by the shortfall in PSIX’s results, especially
on the heels of positive guidance given as recently as September.
Obviously, management made an ill-timed bet on the e-business services sector by buying
Metamor Worldwide and investing in Xpedior (XPDR $1 15/32), just before the short-term
demand curve of the Internet took a turn for the worse. We view the company’s decision to
exit its stake in XPDR and certain non-core pieces of Metamor as a quick move to cut sizable
losses in a segment that changed faster than anyone could have imagined.
Despite the turmoil in PSIX’s business model, we do not think the sale of non-core low-end
consulting operations changes the company’s course, nor do we view it as an annihilation of
the company’s global Internet supercarrier strategy.
PSIX still retains strategic portions of Metamor to strengthen its bundled services proposition
to corporate customers. Specifically, the company is keeping every part of Metamor that helps
customers get up and running in their Internet solutions businesses. Hosting, access, and e-
commerce transaction processing services (in 160 currencies) will still be integrated with
customers’ back office systems. This unprecedented bundle, in our view, continues to position
PSIX in the sweetest spot of the market with regard to winning complex e-business contracts
from corporate customers worldwide.
We note growth in PSIX’s Web hosting business to an annualized run rate of roughly $160
million in 3Q00, and accelerating growth of average corporate contract value to $15,000 in
3Q00 from $9,800 in 2Q00, as positive signs of growth in high-margin product lines during the
September period.
We think the World Wide Web is a major opportunity for growth, albeit lumpy in terms of its
trajectory, that will culminate in the creation of a handful of global supercarriers.
The company is a unique standalone asset with no true peer – the company deserves a scarcity
premium that, we believe, protects shareholders from being zeroed out through a Chapter 11.
PSIX has 3,500 sales and marketing personnel worldwide. We think the company’s huge direct
sales and marketing force, coupled with its significant indirect distribution capabilities, provides
a competitive advantage and should enable PSIX to accelerate growth of its hosting business.
By monetizing non-core assets worth an estimated total of $200-300 million, trimming back
cash capital expenditures by $100-200 million, focusing on the delivery of high-margin services,
and pursuing certain strategic opportunities, we anticipate that the company will make it
through this transition period and, like it did three years ago, prove its doubters wrong.
Because the company has a unique portfolio of assets, we think PSIX is more likely to join
forces with a deep-pocketed carrier in 2001 than to continue trying to go it alone.
Current prices for PSIX equity and debt, in our view, are the result of reckless selling by
investors that are failing to see the strategic value PSIX has created.
We recommend long-term investors double-down on their positions in PSIX, noting (1) that
the company has several months of liquidity in a worst case scenario, giving management time
to decide whether to go it alone or sell; (2) that recent downgrades and selling pressure may
turn into buying interest if/when sentiment on the communications sector changes; and (3)
that the company has non-core assets available for sale that could help it meet its funding gap.
To reflect the increased risk of the story, we are lowering our rating on PSIX to BUY from
STRONG BUY. We are cutting our year-end 2001 price target to $20 from $57, which
represents an enterprise value of $7.6 billion, or 5.0x 2001E total revenues and 7.3x 2001E
“core” revenues (excludes all consulting). We think this valuation, which uses an estimated
WACC of 17% and no public/private market discount, is a very realistic price tag for the last
independent global commercial facilities-based ISP around. PSIX is a key piece of the Internet,
the communications mechanism of the future, and there’s a lot of value down here.
A full ActionAlert will follow later today.
regards,
cg |
