Analyst day helps frame attractive risk/reward June 18, 2007
Goldman Sachs
What's changed
Leap’s recent analyst day provided a deep dive into a niche business model in wireless telecom. Guidance on incremental Auction 66 market rollouts matched expectations, while 2007 financial guidance remains unchanged. The benefit of the deep dive we believe was to reinforce confidence in the existing model, and provide a tangible path to upside relative to existing expectations. Our base case price target remains unchanged at $88, but we see an upside scenario to $127 in our “bull case” framework. We rate Leap Buy. Our new 2007-2010 EPS estimates are $0.63, $1.10, $4.91, and $5.49, from $0.49, $1.11, $3.71, and $4.43.
Implications
Presentations highlighted the opportunities LEAP has in areas such as market clustering and the offering of additional broadband and roaming services. These add to Leap’s “value proposition” and should help increase ARPU, decrease churn and expand the addressable market in the process. While our base case estimates remain unchanged, we believe there is a strong case for higher long-term penetration rates than we have forecast. In our “bull case” upside scenario analysis, we have assumed terminal penetration/EBITDA margins (ex-ESO) of 9.5%/44% (versus our base case of 8.2%/40%).
Valuation
Our 2007YE $88 base-case price target includes long-term assumptions of: (1) 8.2% penetration of covered pops; (2) $50 ARPU; (3) 40% EBITDA margins (ex-ESO). We believe an upside/downside scenario frames a range of $127/$64 respectively, which highlights the attractive risk/reward of the stock.
Key risks
(1) Rising competition in the “unlimited” market; and (2) the customer profile leads to macro risks such as unemployment, sub-prime fears, and gas prices. |
