From RedHerring.com;
redherring.com
Stocks to watch: Capture the Flag
By Lisa Meyer, Stephen Lucey, and Beverly Goodman
Red Herring
May 23, 2001
This is an updated version of an article from the June 1, 2001, issue of Red Herring magazine.
Flag Telecom (Nasdaq: FTHL) is in the Guinness Book of World Records for having the longest fiber-optic cable on the planet -- it runs 17,300 miles, linking the United Kingdom and Japan. Interesting, you might say, but with all the talk about a broadband glut, will this operator of undersea cable sink or swim? We believe in its buoyancy.
While concern mounts that broadband capacity far exceeds demand, that debate is mostly about terrestrial cable. It turns out that few undersea fiber-optic cables actually exist -- just 40 major lines, according to TeleGeography.com, which compiles international telecom statistics and analysis. And those fat pipes are in high demand for their transcontinental connections. "Fears of a capacity glut (especially subsea) are rather overblown," writes Salomon Smith Barney analyst Jack Grubman in a recent report.
London-based Flag Telecom, which competes against Metromedia Fiber Network (Nasdaq: MFNX) and Asia Global Crossing (Nasdaq: AGCX), already boasts clients like AT&T (NYSE: T), Sprint (NYSE: FON), and Verizon (NYSE: VZ). (Verizon is also a 28 percent shareholder.) While its one operational line, Europe-Asia, transfers data at 10 Gbps, slow by today's standards, Flag is involved in a $3.7 billion network buildout scheduled for completion in 2002. As a result, Flag expects growing losses -- from $1.40 per share in 2001 to $2.02 per share in 2002.
Once complete, however, the network will wrap around the globe, linking directly to cities in Asia, Europe, and North America. Profitability is predicted in 2003.
On May 21, the company's stock traded at 10.9 times trailing 12-month revenue of $109 million, compared to Asia Global Crossing's price/sales ratio of 46.91 (on $87 million in revenue), and Metromedia's P/S ratio of 14.2 (on $233 million in revenue). This discount exists despite the fact that Flag's gross margin of 56.9 percent is better than Metromedia's (2.6 percent). Asia Global Crossing had negative gross margins. Flag also has positive earnings before interest, taxes, depreciation, and amortization (EBITDA), unlike the other two.
Using a discounted cash flow analysis, Salomon's Mr. Grubman has a 12- to 18-month price target of $55 for Flag, a 521 percent increase over the May 21 close of $8.85. |
