This sounded good to me. I bought a chunk on Friday and trying to get some of the bonds too.
The Teleconomist
Pledging a New Allegiance to This CLEC
By Cody Willard
Special to TheStreet.com
07/19/2002 10:00 AM EDT
For a very long time, I've been railing against the competitive local exchange carrier business as an investment vehicle. If you're a standard CLEC, your business model relies on access to the networks of your single biggest competitors, the incumbent local exchange carriers. It's sort of like trying to run a shipping business using your biggest competitors' trucks.
That's not an easy proposition, even when regulators are supposedly enforcing such open access. The problems for most of the CLECs went far beyond this, though, as giant debt loads and overambitious plans crippled any hope for self-sustainment.
Allegiance Telecom
The stock has seen quite a slide this year
However, for the second time in three days, I'm about to completely reverse my opinion on a stock, this time a CLEC. I most recently panned Allegiance Telecom (ALGX:Nasdaq - news - commentary - research - analysis) in a May 6 column. Its stock, which now hovers around a buck, slipped 30% since that column appeared and about 70% since I basically predicted its ultimate collapse back in March.
But good execution, tight cost controls and, more important, shifting regulatory sands have worked to make me change my mind about this company. I think Allegiance is actually going to pull it off. And if it does, it probably won't ever be a multibillion-dollar behemoth, but there's undoubtedly huge upside from here. Just as compelling at these levels, by the way, are the company's bonds, which are trading at a huge discount.
The company has been successfully tempering its growth so it can speed up the process of reaching profitability. When it reports its quarterly numbers July 30, I think it will show positive movements in all of its key metrics: revenue growth, EBITDA, earnings and churn numbers, which is a measure of how well the company is keeping its existing customer base.
On the regulatory front, public utility commissions around the country are dropping the rates that CLECs must pay to the incumbents. And they're not insignificant drops, either: We're talking drops of 25% to 70%. Plus, with such drops, those dollars fall straight to the company's bottom line. Margins and earnings leverage off the pricing drops are huge.
Let's put it this way: Conservatively, say the company has 100,000 lines in service in those states. If the monthly cost to lease those lines from the incumbent just dropped from, say, $15 to $10, that's a saving of 500,000 smackers. Every month, instantaneously.
I suppose Allegiance recognizes the futility of guiding estimates higher when no one thinks it can even hit its current projection, which before a recent acquisition, left the company little leeway for error.
That takes us to Allegiance's recent acquisition of WorldCom's (WCOME:Nasdaq - news - commentary - research - analysis) customer premise equipment provisioning unit, which provides services and installation of equipment for businesses. That isn't a bad little fit for Allegiance, which paid $30 million, or about one-half the unit's projected 2003 revenue. In that May 6 column, I wrote that investors should hope that Allegiance acquires some real telecom assets to avoid violating its revenue covenants. This smart purchase fits the bill.
The stock price today reflects the huge doubts that Street analysts (and yours truly) have had about whether this company can make it without some sort of restructuring that would basically wash out existing shareholders, a la McLeodUSA or XO Communications.
But Allegiance is likely to be the only public standard CLEC to survive without restructuring. If we can get some real visibility into its ability to execute, the stock will easily head back to $3 or $5. If you aren't afraid of a little risk, you might want to take another look at this stock, too. |
