GT)WCII--Short Stories With a Happy Ending - BUY
2001-03-08 09:35 (New York)
Gerard Klauer Mattison & Co.
Winstar Communications + (WCII) -- "Short" Stories With a Happy Ending - BUY
John L. Bauer III Joshua R. McIntyre
March 8, 2001
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Price: $11.19 52-Wk Rng:$66.50-$9.88 Price Target:$52 S&P 500: 1,262
Shrs Out/Mk Cap: 92.4Mil/$1.0Bil 1999-2010 Rev. Est. CAGR: 30.8%
Div/Yield: -/- L-T Debt/Cap. (4Q00): 101%
Avg Daily Vol: 1,800,000
Float: 87.1 Mil
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FY Ends -- EPS --
Dec. Curr Prior P/E
99A $(9.21) N.M.
00A $(9.72) N.M.
01E $(10.17) N.M.
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Qtrly -- 1Q -- -- 2Q -- -- 3Q -- -- 4Q --
EPS@ Curr Prior Curr Prior Curr Prior Curr Prior
99A $(2.48) $(2.35) $(2.19) $(2.19)
00A $(2.06)A $(2.32)A $(2.50)A $(2.76)A
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+ Gerard Klauer Mattison & Co., Inc. is a market maker in the security of
this company and may have a long or short position.
@ Quarters may not total due to rounding.
N.M.: Not Meaningful
o Concerns appear unjustified. Over the past two weeks, investors have
been awash in rumors claiming that WCII's point-to-point and point-to-
multipoint radios have been experiencing technical difficulties. We believe
one story currently making the rounds (detailed below) is largely inaccurate.
As a result, we are making no changes to our numbers and are reiterating our
BUY rating on the stock.
o The latest we've heard: Among other things, we have heard that WCII had
spent $1 million to outfit a building in New York City with wireless access
equipment. The inside engineering work apparently entailed drilling through
each floor of the building (which is a high rise) to reach potential
customers with high-speed "CAT 5" cables. The radios installed on this
building supposedly don't work when it rains. As a result of this problem,
some believe that WCII has no customers in this building and that the
investment in the building now needs to be written off.
o These allegations are concerning on a number of levels.
1.Why did it cost $1 million to outfit this building? Our capital-spending
forecast assumes a figure closer to $35,000 to $45,000 per building.
2.Why was WCII forced to drill through each floor to reach potential
customers? We had been under the impression that the company typically em-
ploys the building's internal copper wiring to reach customers. Under this
scenario, WCII places mini-DSLAMs in the basement of a targeted building,
thus transforming the existing internal copper wires into broadband access
loops. Since only a handful of buildings in the world are over 1,000 feet
high (the Empire State Building is 1,453 feet tall), the distance
limitations typically associated with DSL are a non-issue. In some cases,
the company uses existing "risers" within the building or decommissioned
elevator shafts to run its own cables to customers, but drilling through
floors would seem to suggest that the provisioning process may be more
difficult (and time consuming) than we had estimated. This, of course,
assumes this is a common practice.
3.Why haven't we heard anything about rain impacting the quality of radio
transmissions? Rain fade is an old issue faced by every company that has
ever used microwave transmission links for communications purposes.
Presumably, by shortening the distance between radio links, rain fade can be
eliminated to the point where reliability exceeds 99.99%.
o What's really going on: The building in question is located at 677
Fifth Avenue. The company did perform an expensive "core bore" procedure in
this building. This involved cutting holes in each floor and running CAT5 /
CAT7 cable from the roof to the basement. This cable will provide tenants
with in-building broadband access. Fiber companies that enter the building's
basement can reach customers via this cable. Winstar (which has equipment on
the roof) can reach its customers via this cable. Management estimates the
all-in cost associated with 677 Fifth was somewhere in the $150,000 range.
We understand that 25 - 30 of the company's current portfolio of 4,400
buildings have received core bores. These buildings tend to be special
situations. Either they house exceptionally large customers (which justify
the cost) or they represent loss leaders. In the case of 677 Fifth, the
landlord (which can charge higher rents as a result of this infrastructure
upgrade) controls a portfolio of nearly 100 buildings. WCII's access to
these buildings is now presumably greatly improved as a result of the
goodwill generated in this building. According to management, there are
currently four customers in this building. Rain fade has not been a problem
but a construction crane has caused intermittent interference (microwave
radios need unobstructed lines of sight).
o We see no reason to change our capital spending estimates, nor are we
overly concerned about the viability of WCII's technology. As a result, we
are making no changes to our $74 net asset value estimate or $52 target
price |
