SGC Advisory Services Inc. Announces Investment Opinion: Telecommunications: The Innocent Get Massacred; A Rare Opportunity is Created for WinStar Communications, Inc.
STAMFORD, Conn.--(BUSINESS WIRE)--March 29, 2001--
An Opinion by Steven G. Chrust President of SGC Advisory Services Inc.
A unique opportunity has been created by the tremendous reduction in market values in telecommunications companies. Among them is a company which I have a particular affinity for, WinStar Communications, Inc (WCII). This company is better positioned to create value than nearly any other in this sector. Its value has been decimated by a combination of the market dragging down the good with the bad and the focused attacks of short sellers whose tactics are unethical and go unchecked by the regulatory bodies monitoring trading activities.
During the past 12 months the telecommunications industry as a whole has undergone the greatest reduction in market value in its history. Approximately one trillion dollars of market value has evaporated. Even more striking a fact is that market values have dropped nearly 75% for the dominant companies and greater than 90% for the developing challengers. This is quite a shocking statement given that telecommunications is as much a part of the core of our economy as energy, transportation and computers.
A confluence of factors came together to bring about this astonishing activity:
- Valuations just one year ago were at record levels and admittedly
excessive. The excitement over the Internet and its unlimited
opportunity fueled part of this excess as the telecom industry,
the builder of the Internet, was pulled along.
- The overall market reached record levels and sported valuation
metrics never before seen. There was some justification in that
inflation was well under control at low levels and baby boomer
cash flows had reached new highs.
- These elements coupled with the boundless enthusiasm for the
Internet, which caused technology to grow to about one third of
the economy, supported the new measures for valuation. Some even
believed all the old measures for valuing companies had to be
reinvented. This in and of itself should have been a good sign of
the debacle to come.
The WinStar story is quite simple. The company is now better positioned to capitalize on its unique assets and opportunity. We are at that moment in time when the combination of strategy, excellent execution and capital have come together to bring WinStar to the point where incremental revenue brings down to the bottom line the greatest amount of profit. Stated another way, the critical mass of network capacity and the honed experience of the organization are poised to capture market share at a rapid pace. As a result of the market deciding to correct its excesses along with the attacks of short sellers who care little for facts, the gap between WinStar's true value and its current market value is the greatest.
The market has lost sight of the core opportunity. The size and long-term growth of the telecommunications market is undiminished. The potential created by deregulation of the market is far from being fully realized. The unique wireless solution to the demand for broadband capacity, given both experience and technological advancements, has increased. The lack of available capital has made fiber deployment even more difficult. Furthermore, the squeeze in capital has caused competition to be reduced for this space, as some have been unable to reach the critical mass achieved by WinStar before the capital spigot was turned off.
The management team is drawn from many parts of the industry with decades of experience. The company is lead by Bill Rouhana and Nate Kantor. Mr. Rouhana has done an excellent job of guiding the company through uncharted waters and effectively communicating the primary opportunity for WinStar. Mr. Kantor embodies all the necessary experience to succeed in the telecommunications industry. He has, in a short period of time, built an organization capable of growing WinStar into a multi-billion dollar company.
Virtually all research on Wall Street believes the company is undervalued, with the exception of only one risk. The ability of the company to fund itself between now and the time it no longer needs external cash to keep growing, or the point when WinStar is free cash flow positive. The gap will be filled and within a short period of time the street will be eager to invest capital into WinStar. The gap is small enough and thus can be eliminated with a few actions and with little or no equity at this time, which preserves the value of existing shareholders.
The Case:
1. The market is well over $100 billion and growing.
2. The market is still over 80% controlled by the high cost
incumbents, such as Verizon, BellSouth, and AT&T.
3. WinStar has the best management team in the market.
4. WinStar owns spectrum, a unique asset. It owns the largest amount
in the country at the lowest cost, which gives this company the
unique ability to build capacity to meet a significant amount of
this demand.
5. The network, which has many hurdles to being built, is reaching
critical mass. Critical mass is an obstacle more difficult for
others to overcome, given current spectrum costs, availability and
other physical barriers. In addition, restrictions placed by the
real estate industry and high capital costs make on site access a
formidable challenge.
6. The sales and service organizations are well in place and
producing, having met or exceeded expectations for nearly four
years.
7. A misunderstood estimation for needed capital in an exceptionally
difficult capital-raising environment creates the fear of funding
shortfalls. The fact that WinStar requires a relatively small
amount of additional capital and the fact that WinStar is reaching
critical mass differentiates it from the pack.
8. The likely departure of short sellers may create a possible short
squeeze and a run on the stock by buyers given the huge short
position.
So why has the stock fallen by 97% from its high? Or even the 95% one could argue was the correct value after adjusting for the market excesses. The stock market is often driven by emotion. Over the past two years, we have seen a great deal of greed and then fear creating extraordinary volatility. NASDAQ itself has fallen by the greatest amount in history and in the shortest period of time. In the case of WinStar, the baby was simply thrown out with the bath water.
About SGC Advisory Services, Inc.
SGC Advisory Services, Inc. (SGC) is a discretionary money management firm for individuals, corporations, trusts and other taxable or tax-deferred clients. SGC currently manages under $50 million in total assets. Individual accounts are maintained separately, established in accordance with a rigorous review procedure of each client's goals and risk profile. SGC focuses on opportunities in the telecommunications and technology sector, with investments balanced as market valuations and exposure warrant. SGC is a registered investment advisor. SGC and Steven G. Chrust currently maintain an interest in the common stock of WinStar Communications, Inc.
Steven G. Chrust is the founder and president of SGC Advisory Services, Inc., and has been involved with the telecommunications and financial services industry for over 25 years. Mr. Chrust began his career in 1970, at Sanford C. Bernstein & Co., Inc., where he was a partner and the firm's Director of Technology Research and was ranked the No. 1 analyst in the sector for five consecutive years by Institutional Investor.
He co-founded WinStar Communications, Inc., a facilities based local telecommunications provider utilizing fixed wireless technology and was a member of the Board of Directors and its Vice Chairman from 1994 to 1998. Mr. Chrust was Chairman of the Association for Local Telecommunications Services (ALTS), the national organization representing facilities-based competitive local exchange carriers, in 1998. He is a registered investment advisor and a member of the Association for Investment Management and Research and the New York Society of Securities Analysts. He has lectured at the Harvard Business School and testified before the Congress concerning the break-up of AT&T, and before state public-utility commissions on various regulatory matters. |
