FIBER GLUT
(from yesterday's Briefing)
<<<Fiber Glut : The woes of the fiber network purveyors received front-page billing in the Wall St Journal this morning. The move quickly looked prescient, as Level 3 (LVLT) warned this morning, Metromedia Fiber (MFNX) had its estimates slashed by Goldman Sachs, and Global Crossing (GX) was downgraded by First Union. These are indeed tough times for telecom services companies, and particularly those that are loaded with debt and are exposed to the ultra-competitive long-haul bandwidth market. When we recently turned positive on the telecom service sector, we suggested that investors only focus on companies that either already enjoy positive cash flow or that had a very high probability of surviving until they did. The three companies just mentioned do not have positive cash flow, though GX still appears likely to be a survivor. LVLT has lots of cash, but as today's downward revenue revisions indicate, they might not have enough cash. MFNX was a Briefing.com pick back in mid-1998, and after posting huge gains for a few years has now travelled all the way back to 1998 levels. Like LVLT, it has ample liquidity for the time being and might survive, but is not a lock for survival. In this treacherous environment, GX would be about as risky a bet as we would advocate. Some trends, such as falling equipment prices (NT's disastrous warning plays into this theme) and strong long-term growth in bandwidth demand, benefit all players in the sector. But the key positive development in the sector has been shrinking competition as emerging carriers fail. Obviously, only the survivors can benefit from this shift. The Baby Bells, hated as they are, will be survivors. Note that SBC (SBC) is trading up today. It's only a nickel, but any gain looks good alongside the bloodshed hitting emerging carriers. We also spoke positively about Qwest (Q) and Broadwing (BRW). These companies are under pressure today, as they participate more in the long-haul bandwidth segment of the business alongside LVLT. Their declines are understandable given the bad news in the sector, but once again, we would emphasize that survivors should benefit from the failure of some carriers (TSIX is now close) and the need by others (LVLT) to cut back sharply on capital spending. The telecom picture looks bleak, but the recent news is still consistent with our view that the strong can survive and prosper as the weak fail. Many investors are trying to call a bottom on emerging carriers, but betting on future upside for incumbents is a more sound long-term strategy. - Greg Jones, Briefing.com>>>
Namaste!
Jim |
