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Technology Stocks : Broadband Wireless Access [WCII, NXLK, WCOM, satellite..] -- Ignore unavailable to you. Want to Upgrade?

To: transmission who wrote (824)	10/27/1999 12:11:00 PM
From: SteveG	Respond to of 1860

Fahnestock's Bauer/Lee on WCII: Raising rating to Really Strong Buy - 60% discount to NAV suggests we're at the bottom. Investment Opinion: We are reiterating our STRONG BUY rating on WinStar. Our year-end target price of $65 reflects a 30% public market discount to our revised 1999 net asset value of $92 per share and offers a 75%+ upside potential from the current price levels. Key points: · WCII shares have slid nearly 10 points (20%) over the last 2 weeks suggesting that investors are concerned about more than just rising interest rates. We base this observation on the fact that the rest of the CLECs in our universe are only off about 8% over this period, which is to be expected given a 12- b.p. up tick we've seen in rates. It's been nearly a month since revenue estimates for 2000 were guided down 15% and management has made it clear that there are no additional revisions on tap. · WCII typically peaks when its discount to NAV hits 30% to 35% (it has done this 3 times since April) and typically bottoms at a 50% to 60% discount to NAV (4 times since march). In this regard WCII trades like most other CLECs we follow. One yellow flag - the company's discount to NAV has gotten slightly deeper with each of the last three “dips” into undervalued territory. We're such bulls on the company's fundamentals near-term (and longer term) that we believe the trend toward “lower-lows” will be reversed after 3Q results are reported on Nov. 2 when investors are assured the coast is clear. · WinStar is becoming a hybrid CLEC (something we believe management will highlight on its upcoming conference call). Fiber networks are expected to capture a majority of traffic generated by large downtown customers. These networks can't reach “distant” customers because their spurs typically extend less than a quarter mile. Wireless networks can't meet the capacity demands of large downtown customers but they can reach buildings up to 3 miles away from a fiber ring. Put both technologies under one roof and you have a hybrid capable of capturing both kinds of traffic. As a result, hybrids are expected to post higher overall penetration levels, margins and returns on investments (that's why NEXTLINK gets a premium valuation). Over the past 18 months, WinStar has acquired nearly $1 billion in fiber assets so the company is positioned to pursue a hybrid strategy. If it does, NAV estimates will probably go up. If it doesn't, the stock is so cheap it should be bought anyway. Valuation Our discounted cash flow model on page 5 summarizes the key long term fundamental and valuation assumptions that drive our Net Asset Value for WinStar. The top two thirds of this table reflect our fundamental forecast. The bottom third highlights our valuation assumptions. WinStar's net asset value: The mathematics behind our net $92 per share year-end 1999 net asset value estimate for WinStar runs as follows. The net present value of WinStar's free cash flows (EBITDA minus capital spending) discounted at 14% for 10 years approximates $1.5 billion. The net present value of WinStar's liquidation value 10 years hence (based on a multiple of 10x cash flow and discounted at 14%) approximates $6.4 billion. The sum of these two estimates ($7.9 billion) reflects WinStar's gross asset value. After subtracting roughly $1.5 billion of net debt, the company's net asset value approximates $6.3 billion or $92 per share. These figures are detailed in the box in the lower left hand of our 10-year DCF model accompanying this report. The box in the lower right hand side of our 10-year DCF highlights the sensitivity of our target price to different discount rates and terminal multiples. Although a strong case can be made that our 14% discount rate is too steep and our 10x terminal multiple is too light, these metrics continue to successfully identify undervalued CLEC stocks and, as such, we think they represent reasonable (and useful) valuation metrics. CLECs don't have P/E ratios so investors look at “public market discounts” instead: Historically, investors in the telecom and media sectors have measured the investment attraction of earnings-less companies on the basis of their public market discounts, i.e. the discount at which a stock trades vis-à-vis its break-up value. Over the past 15 years we have published dozens of estimated net asset values for companies we've covered in both sectors. By comparing the historical price action of these stocks with our historical net asset value estimates a clear pattern emerges. Typically public market discounts bottom at 50% or so and top out at 30% or so. This applies to WinStar although only recently. For years the company traded at a discount to its peer group reflecting the market's skepticism about fixed wireless networks. The stock's valuation has recently improved reflecting the fact that wireless networks are increasingly being accepted as main stream access vehicles. The tables on the following page offer a historical perspective of WinStar's public market discount vis-à- vis our historical and current published net asset value estimates: · Top Table: Highlights WinStar's price action from February 1998 to the present. A line representing our historical net asset value estimates for the company has been superimposed on this table. Over this period our net asset value estimates have been raised, lowered and raised again reflecting the on-again off-again visibility of the company's near term results. As noted, the stock's historically deep discount vis-à-vis its peer group has shrunk lately reflecting the market's growing confidence in management and its game plan. · Middle Table: Tracks WinStar's “public market discount” i.e., the spread between the company's stock price and our net asset value estimate at any point in time. · Bottom Table: Quantifies the peaks and troughs in WinStar's public market discount over the past 18 months. Note the deep discount to net asset value the stock traded at during most of 1998 and the severe damage sustained by the stock in the “October Meltdown” during that year. Note also that the fluctuations in the public market discount have recently remained within the normal range of 30% to 50% - although the bias has been toward the lower end. Over the past nine months, the stock has bottomed four times when its public market discount traded at the 50% level. The last three times the stock peaked, it did so when its public market discount traded at the 30% level. The current public market discount of 60% is attractive by historical standards hence our enthusiasm for WCII shares.