HAS BROADBAND LOCAL SERVICES CRAZE CAUGHT UP WITH WIRELESS?
Bankers Trust Research/BT Alex. Brown Research
Bo Fifer
April 12, 1999
WINSTAR COMMUNICATIONS INC. [WCII] "STRONG BUY"
TELIGENT INC. [TGNT] "STRONG BUY"
ADVANCED RADIO TELECOM CORP. [ARTT] "BUY"
Has Broadband Local Services Craze Caught Up With Wireless?
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52-WK Earnings Per Share
FY Price Price 3-5 Yr
Est.
Ticker End 04/09/1999 Range 1998 1999 2000 Growth
Chg?
WCII 12 43.00 48-10 (11.96)A (14.90) (10.79)
N
TGNT 12 57.06 47-18 (5.43)A (9.54) (10.30)
N
ARTT 12 13.00 16-2 (2.06)A (3.14) (3.94)
N
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HIGHLIGHTS:
-- Recently, investors have turned a watchful eye toward carriers with an
emphasis on broadband local access services (mainly DSL carriers), and in
the process bid up the prices of many companies to Internet-like
valuations. WE BELIEVE THIS IS THE SAME OPPORTUNITY FACING THE FIXED
WIRELESS CARRIERS, BUT WITH MORE COMPELLING ECONOMICS AND CAPACITY IN A
WIRELESS ENVIRONMENT.
-- POSITIVE NEW NEWS: Wireless CLECs enjoy at least 3 advantages over
wireline/DSL, we believe: 1) the ability to completely bypass the ILEC
facilities, 2) the most optimum cost/capacity profile of any competing
technology, 3) the flexibility to offer variable bandwidth without
compromising efficiency.
-- STOCK PRICE PERFORMANCE: YTD, WCII is up 10%, TGNT is up 98%, and ARTT
is up 73% versus a 57% gain in our CLEC Index and a 10% gain in the S&P
500.
-- NET-NET: We believe both wireless and DSL will be successful in winning
market share from the ILECs. Given the advantages of wireless, and in
spite of the recent run-up in wireless stock prices, we continue to believe
that the fixed wireless carriers currently trade at generally attractive
public valuations--not to mention private market valuations.
-- VALUATION: Our major concern now is that "fast money" may have found
these stocks and could set them up for near term volatility. Nevertheless,
we believe investors should pay close attention to the long term advantages
of fixed wireless. Our DCF-derived 12-month price objectives are as
follows: WCII $62 ("strong buy-1"), ARTT $14 ("buy-2") Our 12-month
objective and rating on TGNT ($50, "strong buy-1"), also based on our DCF,
are under review given the recent surge in TGNT shares. Shares of WCII and
ARTT are more attractive, we believe, on a relative basis.
DETAILS:
Recently, investors have turned a watchful eye toward carriers with an
emphasis on broadband local access services, and in the process bid up the
prices of many companies to Internet-like valuations. Several recent
winners include companies providing digital subscriber line (DSL) service.
DSL basically uses the existing copper plant to address the local phone and
data market, and spices it up with electronics to provide "high speed" data
services. WE BELIEVE THIS IS THE SAME OPPORTUNITY FACING THE FIXED
WIRELESS CARRIERS, BUT WITH MORE COMPELLING ECONOMICS AND CAPACITY IN A
WIRELESS ENVIRONMENT.
How...High...Can You Go?
Among major DSL-centric carriers, the market has recently been willing to
pay some fairly lofty prices for future performance. We estimate the
wireline group is trading at the following Internet-like (i.e. hard to
comprehend) levels:
Comparable Metric Group Range Average
TEV to Gross PP&E 7.5 - 400 125
TEV to 2000 Revenue 6.8 - 100 33.3
TEV to 2000 Lines 19,000 - 128,000 74,000
TEV to "Addressable" Lines 84 - 725 513
TEV= Total Enterprise Value.
Source: BT Alex. Brown Incorporated, company data.
We believe that carriers have yet to scratch the surface of the demand for
broadband local access. Today, the industry is limited in its application
development by the narrow bandwidth available in the last mile. Our belief
is that as that bottleneck is relieved, applications will develop that
require even greater bandwidth, and therefore spur greater demand.
The Wireless Advantage
Wireless enjoys at least 3 advantages over DSL, we believe:
1. NIMCO, or Not In My Central Office. Wireless carriers can completely
bypass the incumbent local phone network. That's potentially a huge
advantage compared with the DSL carriers who must negotiate for CO floor
space and unbundled local loop elements, and then rely on RBOC cooperation
to add its competitive electronics to the existing local loop. We note
that it is not exactly in the RBOCs' best interest to move quickly in
providing access to unbundled local loops, and there may even be some
question as to the RBOCs ability to keep up with the demand from the DSL
carriers.
2. Cost/Capacity Profile Still Unchallenged. We believe that wireless
enjoys a distinct advantage relative to other technologies (such as fiber,
cable modems, DSL, and ISDN) in terms of its cost-to-capacity ratio.
Wireless carriers add incremental customers at a cost measured in thousands
of dollars versus the hundreds of thousands of dollars to connect new fiber
customers, yet wireless is second only to fiber in its ability to provide
broadband services.
3. Unparalleled Flexibility. Have a customer who generally only needs 500
kbps access, but occasionally requests 2 Mbps for short periods of time? In
a wired environment, that means stringing multiple (and fractional) T1 or
equivalent circuits that lie 75% dormant most of the time. The customer
won't want to pay T1-plus rates for occasional use, and the carrier won't
want to supply that bandwidth at fractional T1 prices. Point to multipoint
wireless networks allow dynamic bandwidth allocation. That means the
customer gets the speed he needs when he needs it, and only pays for it
when he has it.
A Wireless DISCOUNT?
In light of the above comments, we would argue for a premium valuation for
wireless relative to other technologies. Today, that relationship is
reversed. To be sure, recent deals involving wireline carriers have drawn
attention to the opportunity in the local loop, and carriers (both wireless
and wireline) are benefiting. We believe as investors read and hear about
the DSL phenomenon, the natural reaction is to ask "how else can I play
this game?" We believe many have turned to Teligent, which has gained 63%
in the past two weeks versus a 6% gain in the S&P 500. WinStar, typically
a more volatile issue, has climbed 35% in the same period. And Advanced
Radio Telecom has posted a 24% gain as management has indicated it is
nearing a conclusion to its strategic investor search. In spite of the
strong recent stock price performance by the wireless CLECs, we believe
they remain an attractive investment opportunity to participate in the
crumbling of the local loop bottleneck.
WinStar
By almost any comparable measure, WinStar appears to NOT be participating
fully in the current local loop excitement. We are reiterating our "strong
buy-1" rating and $62 12-month price objective based on our 10-year DCF.
WinStar appears to be the most undervalued of the wireless CLEC names, and
is where we would focus our investing attention at present.
WCII If WCII
Implied
Comparable Metric Group Range Mult. Traded To Stock
Price
TEV to Gross PP&E 7.5 - 400 6.3 7.5/10.0 $55/$79
TEV to 2000 Revenue 6.8 - 100 6.5 6.8/10.0 $46/$77
TEV to 2000 Lines 19,000 - 128,000 4,679 19,000 >$100
TEV to "Addressable" Lines 84 - 725 192 500 >$100
Source: BT Alex. Brown Incorporated, company documents.
Teligent
Given the recent surge in TGNT shares, we are placing our 12-month price
objective ($50) and rating ("strong buy-1") under review. However,
relative to the wireline multiples described above, Teligent remains
attractively valued.
TGNT If TGNT
Implied
Comparable Metric Group Range Mult. Traded To Stock
Price
TEV to Gross PP&E 7.5 - 400 20.3 30 $85
TEV to 2000 Revenue 6.8 - 100 24.2 33 $80
TEV to 2000 Lines 19,000 - 128,000 13,690 19,000 $80
TEV to "Addressable" Lines 84 - 725 220 500 >$100
Source: BT Alex. Brown Incorporated, company documents.
Advanced Radio Telecom
By almost any measure, ART appears to NOT be participating fully in the
current local loop excitement. We are reiterating our "buy-2" rating and
$14 12-month price objective based on our heavily discounted 10-year DCF.
While we use a 25% discount rate to reflect the imminent need for
financing, using our standard 20% discount rate (which we would apply if
ARTT were to announce a strategic investor had been found) would imply a
$20 price objective.
ARTT If ARTT
Implied
Comparable Metric Group Range Mult. Traded To Stock
Price
TEV to Gross PP&E 7.5 - 400 15.0 30 $29
TEV to 2000 Revenue 6.8 - 100 13.7 33 $35
Source: BT Alex. Brown Incorporated, company documents.
NET-NET
We believe both wireless and DSL will be successful in winning market share
from the ILECs. It will likely be some time before ANY competitive local
exchange carriers go head-to-head. Given the advantages we've outlined
before, and in spite of the recent run-up in wireless CLEC stock prices, we
continue to believe that the fixed wireless carriers currently trade at
attractive comparable valuations. Moreover, given the strategic value of
wireless' ability to bypass the ILEC network, the wireless CLECs are
attractively positioned to participate in the consolidation of the telecom
industry currently underway, in our view. Our major concern now is that
"fast money" may have found these stocks and could set them up for near
term volatility. Nevertheless, we belive investors should pay close
attention to the long term advantages of fixed wireless. |
