CLEC stocksare outperforming most of the telecom services sub-sectors in the second quarter of 1997. Year-to-date, the two top performers are Brooks Fiber (BFPT-33 1/2) up 32% and Intermedia (ICIX-313/4) up 23%. ICG (ICGX-$20 3/4) is next up at 17.7%. WinStar (WCII-12 5/8) continues to get no respect, down 40% since January 1, 1997. Nonetheless, it remains one of our favorites in the group.
We are raising our public value targets based on year two NPV from our 10-year DCF models.
We are at an inflection point where the stocks have been strong, and it is time to target stock prices based on year two (1998) NPVs of our 10-year, DCF model. Terminal values are still 2006, but we are using NPVs one year less than before. We are using the same 13x EBITDA multiple, lower discount rates, and a 25% public discount instead of our prior 30% discount between NPV and theoretical public prices. Most of the CLECs were not as well funded when we did our first NPVs calculation nine months ago. There was also greater perceived regulatory risk, outright hostility from the ILECs and greater competitive threat from the larger IXCs entering the local exchange market without the CLECs. Reality is less threatening than prior year expectations.
GST, ACSI and WinStar offer the most potential return comparing our theoretical public value to current share prices. We believe WinStar has the most significant potential to show in the entire CLEC group with the most funds available for sales and marketing and a low cost wireless fiber technology. We view ACSI (ACNS-7 5/8) and GST (GST-7) both as niche market stories that do not have enough breadth or capital to be leading CLEC players in many of the larger markets they serve.
We are neutral on the leading CLEC, Teleport (TCGI-32 1/2), but give it the lowest discount rate, 11% compared to the rest in the mid to upper teens. Teleport's premium valuation may be overdone with nominal positive EBITDA, and a second-tier market expansion program that may be just as dilutive as what other CLECs are experiencing in 1997. We are assessing Intermedia's outlook with the acquisition of DIGEX and its more complex data strategy. Intermedia has been creative and proactive with frame relay and Internet acquisitions.
Timing is everything in the race to compete against the incumbent local exchange carriers (ILECs). We remain steadfast in our belief that CLECs will grow and prosper as facilities-based carriers. The CLEC group is at a critical stage that is past the early development stage of a venture firm, but still 12-18 months away from positive EBITDA and longer to internally generate funds for its massive capital requirements. With few exceptions, CLECs have raised enough capital to meet capital expenditures planned through mid to late 1998 as well as higher sales and marketing expenses. CLECs remain a high-cash-burn business.
The realities of the telecommunications industry are that things happen sooner rather than later; whether it be shortened technology cycles, quicker industry consolidation, or revisions in business strategies. Previously, we thought mergers and acquisitions to consolidate the CLEC group were not likely until its networks were more developed and it had a bigger mass of subscribers, which meant 1998 instead of 1997 for deals. However, the convergence of long distance and local exchange services accelerates the game of risk for the industry's giants and having a network presence to the customer will be valued. This means having physical access via CLEC network facilities.
Note: ABN AMRO Chicago Corporation makes a primary market |
