on the subject of valuation, here is an excerpt from a Kaufman Bros. analysis (Buy/Buy) from last week. The whole deal is 8 pp. so this is taken out of context but it should give you a place to start.
IMO, the thing that's different about PSIX is the infrastructure. It will be very expensive for someone else to construct what PSI has from scratch.
"...VALUATION
To derive a target public market value for PSIX, we modeled the company's financial results into the year 2002. Key assumptions of our earnings model include:
1. Y/Y revenue growth as follows: 1998-90%; 1999-80%; 2000-50%; 2001/2002-40%. During the next several quarters, we estimate that PSIX will sustain internal growth of roughly 40%-45% and external growth of roughly 40%-45%. The company intends to remain a stand-alone entity and act as a consolidator of the commercial-oriented Internet access marketplace.
2. Gross margin expansion from the low-20%'s in 1998 to the high-40%'s by 2002 as a result of continued migration of traffic onto the company's 10,000 mile OC-48 backbone.
3. Selling, general and administrative (SG&A) expenses as a percentage of revenues of 40% in 1Q98 tapering to the mid-20%'s by the year 2002 as the company benefits from the substantial operating leverage inherent across its various business lines.
4. Depreciation and amortization driven by capital expenditures of $90MM in 1997; $290MM in 1998; $100MM in 1999; $130MM in 2000; $100MM in 2001; and $100MM in 2002.
5. Interest expense driven by substantial debt financings during the next 12-18 months. We estimate that PSIX will remain free cash flow negative as it continues to build-out its Internet infrastructure in the United States and abroad. Given these circumstances, we believe PSIX will require roughly $400MM-$500MM in debt facilities during the next several quarters to fund expansion of its growing Internet infrastructure.
6. No income taxes payable over the next several years due to the company's substantial net operating loss carry-forwards (NOLs). We believe the net present value (NPV) of PSIX's NOLs provide upside to our target public market price because they shield the company's earnings from taxation in 2002 and beyond.
7. Y/Y dilution of the company's share base of roughly 5% due to the exercise/issuance of employee stock options, the potential for mergers/acquisitions, and conversion of the company's outstanding preferred equity into common shares at the end of the year 2000.
 Given these assumptions, we estimate that PSIX will sustain a compound annual growth rate (CAGR) in revenues over the next five years of roughly 56%, leading to 2002 revenues, EBITDA per share, and EPS of $1.1 billion, $4.29, and $1.87, respectively.
 Our discounted cash flow valuation, which uses an estimated weighted average cost of capital of 15%, generates a 12-month price target of $18..." |
