rain parade continuing not fading:
thestreet.com
another perspective issued last Tuesday but still relevant.
GS: CLECs: Will A Rate Cut Turn the Stocks Around? --
07:26am EST 20-Mar-01 Goldman Sachs (NEWYORK) XOXO WCII MCLD FCOM NTKK ABIZ ITC
Goldman, Sachs & Co. Investment Research
CLECs: Will A Rate Cut Turn the Stocks Around?
* * FULL ACTION in the A.M. - U.S. * *
New York Investment Research (New York) - - Investment Research
Larry Benn (New York)- Investment Research
Frank J. Governali, CFA - Investment Research
===================== NOTE 6:57 AM March 20, 2001 =====================
5. XO Communications, WinStar Communications, Inc.
CLECs: Will A Rate Cut Turn the Stocks Around?
XO Communications {XOXO} $10.13
EPS (FY Dec): 2001E US$-5.34, 2002E US$ - Recommended List
WinStar Communications, Inc. {WCII} $6.00
EPS (FY Dec): 2001E US$-11.79, 2002E US$-10.99 - Market Outperformer
* An improving interest rate environment is positive for the CLECs,
however we do not believe that the rate cut expected today will provide
a sustainable catalyst for the group because it is unlikely to result in
a re-opening of the capital markets in the near term. Additionally,
with the markets closed and the liquidity position of carriers
deteriorating, assessment of CLEC models must now give greater weight to
cash burn (rather than just EBITDA), particularly the growing cash
interest component. We remain long-term positive on the top-tier CLECs,
however we expect lackluster near-term performance from the broad group
given continued execution concerns and inaccessible capital markets.
* WE DO NOT EXPECT A FED CUT TODAY TO PROVIDE A SUSTAINABLE CATALYST FOR
CLEC SHARES. An improving interest rate environment is positive for the
group, but the cost of debt and equity are currently so high
(reflecting a whole host of investor concerns) that it is unlikely that
today's anticipated rate cut will have an appreciable impact on the
near-term prospects for CLECs raising capital. We expect the capital
markets to remain largely inaccessible to most CLECs over the coming
months.
* FROM EBITDA TO CASH BURN: SHIFTING EMPHASIS. With the liquidity
position of carriers deteriorating and new funds difficult to secure,
the ability of companies to attain cash flow self-sufficiency is
becoming of greater importance than their ability to simply ramp towards
EBITDA positive (capex, working capital, and debt service obligations,
in most instances, puts a multi-year gap between when CLECs turn EBITDA
positive and when they actually generate free cash flow). That being
the case, investors must increasingly make analysis of cash burn an
integral part of their assessment, and in some instances, that will
yield less positive conclusions (than the EBITDA progression) about how
businesses are ramping.
* DEBT BURDENS GIVE RISE TO EQUITY DILUTION RISK. We reiterate our concern
about CLEC balance sheet leverage and the consequent high fixed
charges. This year, CLECs will spend, on average, $0.19 of every $1 of
revenues on interest payments (we estimate that Allegiance will spend
$0.06 while Winstar will spend $0.37); and even in 2004, we estimate
that the CLECs will still need to spend an average of $0.34 of every $1
of EBITDA on cash interest(we estimate that Allegiance will spend $0.16
while Winstar will spend $0.59). CLECs will need to transform
debt-heavy capital structures into ones that are more long-term
sustainable, and given current low stock prices, the risk of equity
dilution is significant.
* HOW SIGNIFICANT IS THE DILUTION RISK? Debt-laden CLECs, particularly
those with additional funding requirements, may have to evolve capital
structures that are more sustainable than their current ones, and they
may need to set in motion that evolution much sooner than many
appreciate. The dilution risk this raises should remind investors that
while a particular CLEC may be increasing the value of the business by
building networks, solidifying customer relationships, and otherwise
gaining scale, the value of an equity stake in that business could
nonetheless be diminishing.
Important Disclosures (code definitions attached or available upon request)
XOXO : US$ 10.13; CS, M
WCII : US$ 6.00; CS
MCLD : US$ 11.69; CF, CS, M, SP1, SP2
FCOM : US$ 9.00; CF, CS, M
NTKK : US$ 2.16; CF, CS, M
ABIZ : US$ 4.94; CS, M
ITCD : US$ 5.75; CS
ALGX : US$ 17.69; CS, M
NPLS : US$ 3.03; CS, M |
