Sean you asked several questions that leads me to believe that you are not, at all familar with FTEL/FNET or their connection.
You asked, "This all sounds like great news for FNet. But What effect, besides hardware sales does this have on FTEL? Is FNet wholly owned by Franklin? Will Franklin offer it's shareholders a piece of FNet? I,m sure this has been discussed here before, but it will save alot of lurkers like myself from sifting through the archives."
Franklin Telecomm (FTEL), a manufacturer or high tech, state of the art, computer/telecommunications equipment, represents the mothership to FNET, which is a wholly owned ( except for 21%) division of FTEL. FNET, a national ISP was developed to focus it's services towards corporate clientle, ie, video conferencing, high speed ATM, Frame relay, LD phone calls, ISDN, T3, T1, etc. Through strategic alliances with WCOM, GTE, and now Connect America, FNET has positioned itself to be able to present not only premium high end services, but with this announcement is the only 1-800# flat rate ISP in the country.
Although my earlier post reflected 7.5 mill in annual FNET revenues that could be garnered from an almost immediate fulfillment of capacity by February, the $30 million figure was based on the combination of FNET's contribution, plus FTEL's equipment sales.
As a shareholder of FTEL, you own FNET already. The proposed spin-off and IPO'ing of FNET will also benefit you (an FTEL shareholder) immensely. Whether there is a disbursement to FTEL shareholders of FNET stock, or they are retained within FTEL, you still benefit by the market value that is placed on FNET. There are two ways to look at this, both of which are directly reflective of FNET's numbers.
IF FNET IPO'd for $10 and you were distributed (dividend) one share for every share you presently own of FTEL, then in reality FTEL stock is now worth FNET's market value, plus it's (FTEL's) own market value, which in turn would make it worth something North of $10. At least on the surface, it would appear to look like that. What you must remember is that a dividend is viewed as income, so you would have a tax liability to pay on that disbursement. So, if that were the case, and based on a 35% tax structure, the $10 value would be worth $6.50.
If FNET shares were retained by FTEL, then as a shareholder, FNET's value would be reflected in the price of FTEL's shares, but you wouldn't have to pay tax, unless of course you sold. The downside to this, is that the full value is hardly ever reflected in the price of a holding, usually 70% to 80% is norm.
There also exists a third scenario to consider. The participation in the Private Placement of FNET shares, prior to the IPO. In this case your advantage is that you are buying shares for $1.00 and if it IPO's at $10, then you reap a 1000% gain on an independent investment and do not have to pay taxes, until the gains are realized. Again, as with all things, there is a downside risk, as to what price, if at all, that FNET IPO's.
In considering any of these scenarios, you need to understand and evaluate each entity on a separate basis, and base your investment decisions on one of three distinct evaluations. The first being FTEL as an equipment manufacturer and 79% owner of FNET, the second being FTEL the equipment manufacturer, and third being FNET, a state of the art ISP with focused premium services and a niche 800# player.
As I evaluate the above scenario's, I see Franklin bringing in about $20 - $25 million in revenues off equipment in the next 4 qtrs. To position itself for further growth, I anticipate that they will have to be acquisition minded, so to arrive at a estimated EPS I figure that they will have to do a few things. The first will be to raise a little capital via a PP, and to issue some stock for purchase of new strategic acquisitions. Keep in mind that as the stock price soars, the less stock will have to be issued for these acquistions, so I'm being generous in my dilution estimates. With that said, I am basing my EPS estimates on 20 million shares outstanding to cover the next 4 qtrs. Based on equipment alone, $20 mill in revs should net about $8 to $10 mill in pre tax profit, depending on expansion needs.
This would translate into about .40 to .50 annual EPS or about .10 to .125 EPS per quarter. For arguments sake let's use .45 EPS and the industry sector P/E ratio of about 35 equals $15.75. To be ultra conservative, cut that in half, and you have a fair value of between $7.50 to $8.00. BUT, keep in mind that this projection does not include any FNET revs, and is based on 20 million shares, instead of the 11 million odd shares outstanding presently.
That's Franklin.
Now look at FNET. Based on the verified numbers that I posted earlier, your looking at $7.5 mill in annual revenues, that will be on line by February. That was based on filling up the capacity of OC12, not the OC24 that they have already installed on premise. So, logically your looking at the potential of doubling that capacity and revenues to $15 million. Because the number of shares are not established at this time, I can only make a fair guestimate and base it on the 5 million shares that have been established on the original Private Placement, or in other words base it on the known shares, rather than future dilution. It will be compensated for at the end of this estimate. Also, because they have some type of unidentified revenue sharing aggreement with Connect America, I can only estimate that it may be a 50/50 deal. Based on the above, we would take the $15 million potential revenues over the next 4 qtrs, divide it by the number of shares (5 mill) and that would equal $3.00 per share revenue. We will use a conservatvie 50% net profit margin, equal to $1.50 EPS divide that by 2 (Connect Americas share) and you would come out with a .75 EPS. Use a conservative 20 P/E that's $15 market valuation, in itself. But again, let's be ultra conservative, and cut that in half, and you are talking fair market value of $7.50 per share. Keep in mind, this is FNET as a stand alone company, and does not take into account any of the other services that are going to come on line, such as telephony, video conferncing, etc. That would more than compensate for any other shares that may enter into the picture, up to 20 million outstanding.
Now combine the two, FTEL and FNET and using the lowest figures, you have a $15 stock value based on future earning potential. But again, lets remember that I said that if they were combined, the valuation of FNET wouldn't be fully priced into the stock, so take 20% out of the price (unfairly including FTEL's valuation just to be ULTRA consevative) and you're looking at $12.00.
You can slice, dice, and quarter these numbers any way you like, but the reality is that the value of FTEL, TODAY, is, and has been, well in excess of $3.00 for some time. Keep in mind, the first two weeks of November we were told that they had done more business than they did all of last year. At that time, I estimated that the month of November probably produced close to $2 mill in orders, and yesterdays announcement stated that they had to stand in line behind other customers, to be able to supply equipment to FNET. You figure it out, they are jammin. So for me to estimate that they are on track to do a estimated $20 million in equipment for the next 4 qtrs, I think is a fair and conservative estimate, especially when Frank himself has stated that the Cycolone will most likely be Franklins biggest product in the history of the company, and at one time Franklin was pumpin close to $50 mill (from memory) in revs before they sold out to Exxon, if I'm not mistaken.
What you read yesterday, was monumental, not so much because of the numbers, but because of two other factors that are easily overlooked and are difficult to put a price on, Leverage from FNET on your FTEL shares, and even more so, the sole niche market that FNET has to itself for the time being. They can establish a undetermined amount of new corporate clients with this service, and literally have their foot in the door, to market other services as they come on line. That my friends is priceless.
RB |
