Joseph Gunnar & Co. Issues Report on Qwest
PR Newswire, Monday, August 09, 1999 at 18:00
Initiating Coverage Buy - Price Objective: $45
NEW YORK, Aug. 9 /PRNewswire/ -- The following is being issued by Joseph
Gunnar & Co., a member of the National Association of Securities Dealers,
Inc., CRD# 24795:
Summary:
Qwest (NASDAQ:QWST) recently announced its intentions to acquire US West
Inc. It concluded a battle with Global Crossing Ltd. over the possible
acquisitions of both Frontier Corp. and US West. Qwest agreed to merge with
US West, ending a one-month long battle, while Global Crossing won the bidding
for Frontier Corp. Qwest agreed to pay Global Crossing $420 million in deal
breakup fees for ending its merger agreement. Qwest's offer for US West is for
$69/share or around $35 billion. The stock has taken a significant hit as a
result of the bidding wars and the uncertainty surrounding the merger and is
now substantially lower than its 52-week high of $52 3/8. The stock as of
August 09, 1999 was trading around $26 1/4. We feel this is an opportune time
to buy Qwest Communications Inc.
MILLIONS Q1 Q2 Q3 Q4 YE
REV/EPS
(99): 878.4/.01 873.7/.03 NA/.03(e) NA/.06(e) NA/.13(e)
REV/EPS
(98): 177.0/(.02) 393.7/(.03) 806.8/(0.1) 865.1/.02 2242.6/(.04)
EPS are fully diluted.
Stock Price (8/09/99) $26.25 P/E (est. 12/99) 202.0
52-wk Range $52.38-$11.00 5-year growth rate: 17%
Revenue (mm) $2722.4 Target Price: $45
Mkt. Capitalization (mm) $18480.0 Dividend: NA
Second Quarter Results
Qwest's CEO, Joseph Nacchio, was pleased to report a strong second quarter
with record revenues and growth. This quarter marks the ninth consecutive
quarter Qwest has met or beaten its business plan. Internet and data services
had an excess of three-digit growth for the quarter with revenue growing to
twice the amount of the second quarter of 1998. Total revenues grew 26% to
$873.7 million, while EBITDA increased five times from a year ago to
$134.2 million. Revenue advanced for the quarter from $393.7 million a year
ago to $873.7 million this year. Revenue grew approximately 40% from strength
of surging data and Internet sales. Communications services revenue grew 46%
to $790.4 million, with expected growth of 30-40%. Qwest posted better than
expected earnings for the second quarter of $0.03 a share versus estimates of
$0.01 a share. US West Inc. recently reported a better than expected
9.4 percent rise in second-quarter profits. Net income rose to $421 million
or $0.83 a share versus $385 million or $0.76 a year ago. Wall Street's
earnings estimates according to First Call were $0.81 a share. The company's
estimates for the year 2000 are bullish above the consensus of $3.56 a share.
Conference Call Highlights
Qwest has a well-defined business plan and has one of the strongest
partner relationships in the emerging data services business. Qwest has three
data centers as of today and has plans to expand to nine data centers by
year-end. Qwest is determined to remain a growth company and is consistently
demonstrating this with partnerships and acquisitions. Qwest has formed
partnerships with companies such as Microsoft, KPMG and Hewlett Packard, which
should help generate additional channels of revenue and give Qwest additional
distribution channels. Qwest emphasized their product and technology
partnership infrastructure and strategic relationships. Microsoft recently
invested $200 million in Qwest and has offered Qwest access to its vast array
of value added resellers to sell its web hosting, e-commerce and security
services. Qwest created a new business, Qwest Cyberdot Solutions, with KPMG.
This business tailors the delivery of ASP based services to customers. They
currently have contracts outstanding worth $400 million. In the last three
months, Qwest has tripled its web-hosting capacity, increased facility space
six-fold, tripled daily level of IP packet traffic and doubled ATM switches.
Construction revenues now account for less than 10% of total revenue, which
used to be 80% of their revenue base two years ago. They have successfully
navigated the transition to service revenue. Qwest has a growing list of
Fortune 500 companies who they have penetrated and gained account
relationships with such as Fannie Mae, Comcast, Proctor & Gamble, Walgreens,
Chase, NEC, DLJ and Charles Schwab. Qwest and BellSouth announced a strategic
partnership in April that includes a $3.5 billion equity investment by
BellSouth for stake of approximately 10% in Qwest. The partnership will be
able to jointly deliver an integrated platform of end-to-end services. Qwest
closed on $120 million of annual revenues to be moved from BellSouth to Qwest
as a result of their recent partnership and expects the future benefits to be
even brighter.
U S West Acquisition Summary
Qwest and US West recently announced a merger deal of $35 billion. The
acquisition provides Qwest with additional synergies resulting from reductions
in capital spending and will provide the company with $7.5 billion to use for
future investments. With this acquisition, Qwest is putting itself on the map
with other telecom mega-carriers. This deal will not only give Qwest millions
of local customers, but billions in revenue to finance its aggressive strategy
and the size to combat the likes of AT&T, MCI WorldCom and Sprint. The
combined company projects revenues over $12 billion in the next five and half
years and growth rates around 17 percent per year. The new company will
provide local, long distance and international communications such as Internet
access and multimedia to its customers. Additionally, the deal provides
substantial economies of scale. With the addition of a local partner, the
long distance carrier can bypass access fees and reduce costs. The deal is
contingent upon Qwest's share price staying between $28.26 and $39.90. Outside
this range, Qwest will offer a fixed number of shares. US West is entitled to
walk away from the deal if Qwest's share price stays below $22.00 for a
sustained period. The deal is expected to close in the next nine to twelve
months.
Conclusion
Qwest is establishing itself as an important player in the new-world order
of telecom and is positioning itself to be a global provider of end-to-end
integrated on-net facilities-based solutions. With the additional cash and
distribution channels provided by the US West merger, Qwest should truly poise
a threat to the other telecom mega-carriers. We are extremely bullish on the
US West deal for Qwest and as a result are initiating a BUY rating on the
stock with a twelve-month price target of $45.
Joseph Gunnar & Co., LLC and its respective officers, employees,
shareholders, affiliates, clients and members of their families may have long
or short position in, and may from time to time purchase or sell, any of the
above mentioned securities in the open market, from or to customers of this
firm or otherwise, for their own account at any time. The information and
statistical data contained herein have been obtained from sources, which we
believe to be reliable but in no way are warranted by us as to accuracy or
completeness. The information in this report is not intended to be used as
the primary basis of investment decisions, and because of individual client
objectives, it should not be construed as advice designed to meet the
particular investment needs of any investor. Any opinions expressed herein
are statements of our judgment on this date and are subject to change without
notice. Reproduction without the written permission is prohibited. This is
not a solicitation of any order to buy or sell. Joseph Gunnar & Co., LLC, may
act as a financial advisor or render investment banking services to some of
the companies mentioned in this report, and Joseph Gunnar & Co., LLC, along
with various employees may hold warrants to purchase their shares. Additional
information is available upon request. Past performance is no guarantee or
indication of future results.
SOURCE Joseph Gunnar & Co.
-0- 08/09/99
/CONTACT: Samantha Young, Analyst-Equity Research, 212-440-9600, or
sammich_1@yahoo.com/
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