The main reason that many telcom's are failing is because of high debt load. A low debt load company can weather much bigger downturns without going under water. And of course, once you are behind the curve on this one, a high debt company get's its equity priced down towards zero, because the total value of the business is darn close to the total amount of debt. AT THAT POINT, it is MUCH more expensive to swap debt for equity, and it may be essentially impossible. This is the point at which debt is trading for a real discount, and gets known affectionately as "junk."
Don't you wish that Leap was able to float some equity at tolerable price, and use it to nuke some of the interest expense off their bottom line? When you have debt, your cash flow goes to interest. When you don't have debt, your cash flow goes to building value for the equity holders.
If Nextel was able to:
1) Swap debt for equity
2) Turn a profit
that DOES suggest the business model is working. It doesn't prove it, but it suggests it.
Underlying the investment in wireless telcom's that have no profits has to be the expectation that the business "really" is profitable, even though the amazing business expansion rates result in expenses which exceed income in all the quarters where the expansion is high. By turning a real profit, it would seem that Nextel has proved, and in a tough market, that EBITDA really can translate into E when I is cut down. (In semi-english, Earnings Before Interest, Taxes, Depreciation and Amortization can translate into pure Earnings when Interest is cut down, for example, by turning debt into equity.)
Looking back at the era of unreasonably high stock prices, one wishes that with equity offering capital so cheaply that these companies had all nuked debt for equity. During that era, I believe LWIN did some secondary issuing, but my memory is vague. I know QCOM did a big secondary issue when the got listed on S&P 500. As a stockholder owning these companies, I was very happy about the secondary issues. If the market wants to throw money at my investment, then better the chance my investment will succeed. Dilution as such doesn't bother me: unless the stock is undervalued, the business should grow by at least the dilution ratio, IMHO.
Assuming it is not just booksmanship that got them profits on the books, I think Nextel is doing great! IMHO. |
