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Strategies & Market Trends : Making Money is Main Objective

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To: Softechie who started this subject	8/2/2001 11:42:52 AM
From: Softechie	Read Replies (1) of 2155

MCLEODUSA (MCLD: $2.82) 8/2/01 2Q01 Rpt'd: Revs In Line While EBITDA Well Ahead Of Ests; $100M Equity Infusion Ann'd; Cutting Price Objective Annual EPS Prev. EPS 12/02E 12/01E -1.20 12/00A -0.83 Rating: STRONG BUY Change: 12-Mo. Target: $11 2Q reported revenues were $474M, up 9% sequentially and 43% y/y, and 1% below our estimate. EBITDA (excluding one-time items) was $34.2M, up 53% sequentially and 16% above our estimate of $29.5M as a result of tight control of SG&A. Forstmann Little has agreed to make an additional $100M equity infusion. In addition, the terms of the original Forstmann $1B convert. investment has been renegotiated, resulting in the elimination of the dividend (annual savings of $35M over five years) in return for a 50% reduction in conversion price to $6.10 from $12.17. Separately, MCLD announced the appointment of Chris Davis as COO and CFO. Davis was formerly CFO of optical networking equipment maker ONI Systems. Based on a more conservative growth outlook by management, we are revising our '01 revenue estimate downward slightly to $1.9B from $1.95B and are reducing our EBITDA estimate to $140M from $150M. In addition, we are reducing our '02 revenue and EBITDA estimates to $2.1B and $294M from $2.6B and $400M, respectively. We are reducing our price target 62% to $11 from $29. This change reflects the following: 1) increasing our discount rate to 17% from 14% to reflect the higher implied cost of debt; 2) reducing our terminal year EBITDA multiple to 8x from 12x to keep the implied perpetual free cash flow growth rate in the mid to high single digit range; 3) reduced long term revenue and margin expansion assumptions in our preliminary revised model; and 4) additional dilution from equity infusion.

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