IN, a Barrons pick, looks very interesting
<<Q: Let's get into individual picks. Mike [Michael Cahill
Chilton Investment Company], what do you like?
Cahill: Infonet is a company we like a lot. They are a global provider of high-end data services. Their customers and capabilities are exactly what the major players want to own, control and develop further. So in our mind they really are in kind of the sweet spot of the telecom- services industry. There are only a couple of companies like this in the world.
Q: Mike, where would you be focused right now?
Cahill: I'm focused more on the companies that control their customers and are closest to the customers as well as those companies that have a lot of high-value-added services in the data-services industry. Infonet, one of my picks, is a good example of a company that provides very high-value-added data services to the customers. That capability is a relatively unique asset around the world, and that's where all the big phone companies want to go. They want to buy that data capability. They want to buy the companies that control the big multinational companies around the world. There is always a lot of M&A that takes place in the sector and you want to look at some of the smaller names that have specific catalysts. You want to be in names right now that have a driver to get the stock price to a higher level because, we all agree, it could be nine to 12 months before things fundamentally improve for the industry.
[And what would be an example of a similar company?]
Cahill: Equant is one of their closest competitors, and France Telecom is buying Equant. The valuation of Equant, based on a multiple of EBITDA or revenues is roughly almost two times that of Infonet. Infonet has operations in 63 countries, and their standard offering right now to new customers is an access connection of 45 megabits per second. That's a very fat pipe, and it demonstrates how big some of their customers are. They have no debt, though they have $112 million of capital lease obligations. They have $550 million of cash, they are EBITDA positive and they are net-income positive. They turn free-cash-flow positive in this fiscal year, which ends March 2002. They are huge beneficiaries of the meltdown in global bandwidth prices, because that's one of their biggest costs of doing business. We think it is really compelling from a valuation perspective. The stock is around $7 and our discount cash flow models yield about $13 to $14. What's been an overhang for the company is both a positive and a negative. Infonet is owned by six major phone companies around the world. Some of the companies want to raise money and sell their stake. KPN hired some bankers to sell their stake in Infonet. It is unclear whether KPN will sell its 17% stake outright, or whether the whole company gets sold because Infonet has hired its own bankers to explore the potential sale of the entire company. But we view it as attractive as a stand-alone, and if it does get taken out, that's great.
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