Jason:
Actually, you are wrong.
...Negative earnings don't help, but it's the negative book value that really has investors spooked. Why not sell for $13 today, when if they liquited the company tomorrow, you would get nothing and still owe creditors an additional $5?
Let me quote to you from a source I've used before:
Book value is something of a misnomer, because it represents no standard of value; it is an accounting term, not an appraisal term... [emphasis in the original]
What you are searching for is liquidation value, either orderly or forced. Let's look at a "back of the napkin" analysis of an orderly liquidation of Winstar. (Note: the following figures are based upon the 2nd quarter 10Q).
Your owing of creditors an additional $5 per share is simply assets minus liabilities minus preferred stock, a hole of $196 million.
What are some of the company's assets? It has $700 million in cash and marketable securities; it has PPE net of depreciation of $380 million. It has FCC licenses, net of accumulated amortization of $239 million.
Of course, the PPE might be worth less in a liquidation if it is sold piecemeal rather than as a network and without the licenses. In contrast, the license total is probably understated since many of the individual licenses were acquired for free. For simplicity, let's assume this is a wash.
Would there actually be remaining indebtedness of $196 million, basically washing out all the common equity? Unlikely, I forgot one little asset. It is called the customer base. That customer base generated $155 million TTM revenues. There are a lot of telecom companies who would buy that base, right now. You value it using a decay analysis. You take the revenue stream, determine what the likely contribution margin would be to the potential acquirer, reducing the year-by-year revenues by some churn factor. The yearly revenue contribution is discounted at the acquirer's cost of capital. Again, back of the napkin, if one uses a contribution margin of 60-70%, a decay rate of 10% and a discount rate of 12%, that $155 million TTM revenue is worth about $550 million, a 3.5 multiple.
We can argue about forced versus orderly liquidation and/or the value of the individual assets till we are blue in the face but the numbers are somewhere in this range. Net, net, the common equity in this example has at least $300 million worth of market value in an orderly liquidation today. Yet, every dollar increase in revenue increases the value of the sub base asset 3.5 times. This is partially offset by the reduction in cash expended to drive the incremental revenue. However, since the company is not spending 3.5 dollars in cash (op losses and capx) to drive a dollar of incremental revenue, every dollar of incremental revenue increases shareholder value, even in a liquidation scenario.
As a long term hold and assuming management continues to execute, today's price, as an entry point, is a bargain. If the market thinks otherwise, sobeit.
ww |
