Savvis now on the Americas Conviction Buy List; Replaces Leap May 10, 2007
Goldman Sachs' Rating/Coverage View is Buy/Neutral
Source of opportunity
We are adding Savvis to the Americas Conviction Buy List, replacing Leap, which has been on the List the past five months. Shares of Leap have risen 43% since we added the stock to the List on November 29, 2006, compared to an 8% rise for the S&P 500. Leap shares and the S&P 500 are up 72% and 14%, respectively, over the last 12 months. We still rate Leap a Buy, but out of our 22 stock coverage universe, we see the most opportunity in Savvis at this point.
Catalyst
We hosted a meeting with Savvis management this week, which helped provide further confidence in the trajectory including a robust pipeline, pricing leverage still in favor of the data center operators, and a market niche that provides competitive insulation versus much larger providers of hosting services. Post the meeting, we are now factoring in higher pricing per square foot longer-term, as supply/demand imbalance clearly still offers pricing leverage to the suppliers.
Valuation
Adjustments to our model as well as a change to our approach to multiples-based valuation moves our price target for Savvis to $59 from $52, implying ~17% upside potential. This is an average of DCF and multiples-based methodologies. Our prior multiples-based framework had pegged valuation in the middle of enterprise/wholesale carriers on the low end and the wireless Tower companies on the high-end. The trajectory of this company is angling even more towards the colocation/hosting segment and away from network services. As such, we’ve moved the multiple framework to weight it by business mix, which means a higher weighting to the towers as comps for the core collocation/hosting business. The weighted average multiple is 18.5X ’08 EV/EBITDA, from 17.0X previously.
Key risks
Welsh, Carson, Anderson and Stowe own 46% of Savvis’ equity and come off lock-up in a month. If they surface as a seller, then the knee-jerk reaction might be negative. However, further liquidity should be a positive for the stock, and given recent success in the secondary and convert offerings, we believe there would be no shortage of investor demand. |
