excellent piece from microsoft investor follows. fwiw, i just recently discovered metromedia, so i'm not in; however, i am an avid shareholder and follower of a handful of tele- and datacom stocks. this one definitely piques my interest and i intend to keep an eye on it.
any comments/opinions from long-term buy-and-hold investors are appreciated.
-chris.
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Metromedia Fiber keeps its resilience
Was this new-age telecom company unfairly caught in the recent sell-off? It's got little debt or global exposure -- just tons of bandwidth to sell cheap.
By Mike Robbins
OK, so trouble in the emerging markets has begun to affect the bottom lines of a lot of U.S. multinationals, sending their stocks reeling. But what does that have to do with Metromedia Fiber Network (MFNX)?
That's what a lot of investors are wondering right now, as they've seen the stock plunge 30% to $25.50 since late August. While Metromedia Fiber is controlled by Metromedia International Group (MMG), a communications firm operating in the emerging markets, Metromedia Fiber constructs high-bandwidth fiber-optics networks in large U.S. metropolises. The firm's only international presence is a pair of projects in Germany and the United Kingdom, and foreign competition isn't an issue when it comes to domestic telecommunications. "Whether the Chinese devalue or not has very little relevance to Metromedia Fiber's business," says Alan Feldman of Sands Brothers.
Yet Metromedia Fiber stock is one of hundreds of securities caught up in the market's sell-off, leading some analysts to suggest that this might be a good time for risk-tolerant investors to get in on a great young company.
Raves from analysts
Talk to a handful of analysts about Metromedia Fiber and you'll hear more superlatives than you would at a Don King press conference. "I'm extremely bullish," says Feldman, who isn't alone. "I have it as a 'strong buy,' with a one-year price target of $40."
According to both Zacks and Standard & Poors, every analyst who covers the stock rates it either a "strong buy" or "moderate buy."
Metromedia Fiber is often grouped with any number of relatively small companies under the heading of CLECs, or competitive local exchange carriers -- the companies fighting to win a share of the local communication market under deregulation. But Metromedia Fiber is less a CLEC than it is a supplier to CLECs, as well as to other communications firms.
Rather than market communications services, Metromedia Fiber arranges long-term leases of the fibers in its fiber-optic network to communications carriers, including CLECs, but also long-distance companies, Internet providers and others, as well as to businesses that have huge demand for communications, such as financial-services firms.
Since Metromedia Fiber is leasing capacity to other carriers and not joining the battle for retail customers, its stock is a way for investors to bet on the growth of telecommunications capacity demand without gambling on any particular CLEC David against a Baby Bell Goliath. "Metromedia Fiber is a direct play on the scarcity of capacity, on deregulation, and on the explosion of bandwidth-intensive applications," says Stuart Conrad of Deutsche Bank Securities.
Or, as Salomon Smith Barney analyst Jack Grubman put it in a recent report, Metromedia Fiber is "an arms supplier to the various local warriors which are going to attack the local market."
That's pretty heady stuff for a still-small company that's only been in business since 1993. But so far, Metromedia Fiber has provided reason for optimism, as revenues have topped expectations.
Customers come to Metromedia Fiber for one simple reason: No one else offers what they do. In the highest-population-density cities in the U.S., including greater New York City, Philadelphia, Washington, D.C., and Chicago, Metromedia Fiber is the only firm selling fixed-cost access to a virtually unlimited-bandwidth fiber-optic network. If you want to start a communications company to serve these key regions (together, the regions Metromedia Fiber covers make up about one-third of U.S. telephony traffic) and you don't want to spend the time and money required to install your own network, Metromedia Fiber is really the only choice. If you're an investment bank with huge demand for data transport and you want to get off the meter, Metromedia Fiber might well be the only reasonably priced option.
Way out front
Other companies aren't jumping in to compete with Metromedia Fiber because they can't -- at least in the near future. While most firms with fiber-optic networks have 24, 48 or at most 96 strands of fiber per cable, Metromedia Fiber ran 432 strands per cable in New York City and Chicago, and 216 in Philadelphia and D.C., anticipating the huge growth in capacity demand.
"Most of the cost in building these networks in places like New York City is in digging up the street," explains Seth Wilson of Ernst & Co. "The cost for each additional strand is relatively low." Thus, Metromedia Fiber's high-strand-count approach offers tremendous economies of scale. And the firm's strategy of selling fibers outright, rather than operating as a service, significantly lowers front-office expenses as well. At last count, this billion-dollar company had only about 50 employees. Add it up, and Metromedia Fiber is easily the lowest-cost bandwidth supplier in the U.S.'s major northeastern metropolises. "They've blown away the price structure on bandwidth," says Feldman.
True, other firms might try to take advantage of the same economies of scale in the future, but infrastructure construction projects are expensive and -- perhaps more importantly -- time-consuming. Digging up the streets of New York City or any other city to lay cable means taking on all sorts of regulatory headaches. That Metromedia has been able to build its fiber-optic networks on or ahead of schedule in big cities like New York and Chicago is regarded by most observers as a tribute to the company's management.
Chief executive Stephen Garofalo, former president of F. Garofalo Electric, and president Howard Finkelstein, former president of Metromedia Communication, each have decades of experience in related fields. "There's a lot of expertise there," agrees Wilson. "It's a very strong management team."
Meanwhile, Metromedia Fiber is taking advantage of its capacity in the northeastern U.S. to expand into other areas, by swapping its fibers for those of other firms. Thanks to the company's high-volume cables, it can afford to trade away some fibers. "They've been able to obtain long-haul fiber at a very small fraction of what it would have cost to build a network themselves," says Conrad.
The company is in the process of expanding into Germany, the United Kingdom and to the San Francisco-Silicon Bay region through fiber swaps, partnerships, and with cash from the October 1997 initial public offering and from ongoing sales. In fact, despite Metromedia Fiber's sizable assets and fast growth, the firm has essentially no long-term debt.
The oversupply issue
The huge growth in bandwidth capacity in recent years has led some observers to fear oversupply -- potentially a very serious problem for Metromedia Fiber. But most analysts still believe that oversupply is unlikely at best in the near future, especially in Metromedia Fiber's key high-population-density regions. "Silicon Valley is full of companies designing products that depend on the assumption that bandwidth will continue to increase," says Robb Parlanti, senior portfolio manager at Turner Investment Partners. "So I don't think there will be a glut anytime soon."
Finances are another potential worry. Although Metromedia Fiber has thus far done an impressive job of keeping the balance sheet free of debt, many analysts believe that continued growth likely will require additional cash. Still, Metromedia Fiber is in a better position than most young companies to raise funds. Take, for example, the deep pockets behind the firm, including billionaires John Kluge and David Rockefeller, who are directors.
It's also worth mentioning that Metromedia Fiber is still very much at the developmental stage. This is a 5-year-old company with a 1-year-old stock. Firms of this sort are not known for their stable share prices.
And analysts don't expect the company to earn a profit this year or next -- though it's getting closer than many similar companies. Metromedia posted a loss of 44 cents a share in its last fiscal year but it's only expected to lose 12 cents a share this year and to make 5 cents a share in 1999. It shocked analysts in its last quarter by posting a profit of 4 cents per share.
Finally, there's the matter of valuation. Despite the stock's recent drop, it's far from dirt cheap. But Wilson, for one, believes the price is more than fair. "Compared to its most comparable companies, Qwest (QWST) and IXC Communications (IIXC), it's selling at an attractive value."
Add it all up and you have a well-run firm with no emerging-markets exposure, little direct competition, and a clean balance sheet in what is potentially one of the best growth sectors around. Throw in the fact that Metromedia Fiber is seen as a possible takeover target, and you begin to understand why it's so hard to find anyone with anything bad to say about the company.
"We've been quite positive on Metromedia Fiber since Day One," says Conrad. "They have very quietly put themselves in a very attractive position."
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