Allen -
gx versus other fiber landlords
I think it is obvious that GX is in a better position than "other fiber landlords", depending on how you define who the fiber landlords are, as well as "position". If the comparison is to LVLT, then yes, I think GX is in a better position. And by position, I understand here: "ability to survive over the next 2 years and have a thriving business".
TCM - well, TCM is not crushed by debt like other fiber mavens are (including GX) - but then, where from here for TCM? No question that TCM can survive, and do so with more ease than GX, but survive for what? Their underlying cable-laying business will fall off a cliff over the next 2 years. They may have the $ (rich parent) to lay down a lot of cable and perhaps duplicate about 50% of GX's network, but that's iffy. They won't have the fiber-based data transporting business like GX, but on the other side of the ledger, they won't have to pay out crushingly large amounts of $ to service debt like GX has to. So, pick your poison.
Do we call WCOM, T, FON and some of the other international incumbents - "fiber landlords"? Well, they are definitely competition for GX - as a matter of fact, GX's main competition, but on the other hand I'd not necessarily call them "fiber landlords", as so much of their business has not much to do with fiber per se (especially with T's emphasis on cable, wireless etc.). Is GX in a "better position" than they are? How do you judge that? T is about to disappear in a major reorganization, so what's left after that transformation - what will you even call it - I don't know or care, I wouldn't invest in them. On the surface a WCOM seems better off in that they are in no immediate danger of a demise, the way GX is (i.e. the next 2 years) - WCOM actually has positive earnings (as do all the incumbents), but they are in a dying mode, being slowly eaten by the GX's of this world, and they too sport quite some debt, which doesn't mean much now, but if GX et. al continue to eat into their revenue/earnings stream, may start presenting a problem. However, that presupposes that GX etc. will survive. Of course, if the incumbents manage to transform themselves, and rejuvenate, they may down the road do well - but will the shareholders do well? I don't like the odds.
In particular, if one concludes that there will be survivors, and is in for the long haul, should'nt fiscal soundness be the most important criteria?
YES. Things are really reasonably simple. GX is under tremendous pressure. And I mean HUGE pressure, financially. As if the shareprice action is not enough of a clue, the facts are scary. I won't force-feed you all the numbers, but pull up GX's SEC filings (Qs & Ks), and do the really simple math. (a) Take GX's operating costs. (b) Take ALL of GX's interest payments (don't forget preferreds). Now take GX's total revenues and after the tax adjustments see how much you have left over after backing out (a) and (b). Now remember that GX is not done with cap-ex (just listen to the last CC, where they adjusted those going forward down somewhat) - that is (c). That is really adding more debt, some of which has to be serviced with interest payments. Now, since clearly earnings do not cover all of the above (a), (b), (c) - you get a gap that has to be filled somehow. That's where you get to look at what's open to GX. They have some $2 bln. after tax from the ILEC. They also have some $1.7 bln revolving credit - for a total of $3.7 bln. That has to last until their earnings cover at least all of the operating costs and interest payments are covered from proceeds of their business. Eventually all that debt has to be paid off, but for now, let us ignore that. Can they pay for their cap-ex from the $3.7 bln, and cover operating and interest payments from earnings going forward? Btw., while cap-ex should fall dramatically in 02 and going forward, it is not like it will completely disappear from the ledger - ever. So, you will always be left with (a), (b), and (c) - until you pay off your debt, at which point you are left with only (a) and (c) on the debit side - but that is far, very far into the future. Of the most immediate interest is can (a), (b), and (c) be covered by the combination of the $3.7 bln and revenue/earnings? That's the crux of the matter. And that is why the street reacted so negatively to any suggestion of scaling down rev/earnings guidance going forward. Because, if a,b,c, cannot be covered by the 3.7 bln. and earnings/revenues - GX will have no choice but to go back to the capital markets. And those are in not a generous mood. They'll have to pay through the nose to fill that gap. But that is not the worst from the point of view of the common shareholders. The worst, is that GX may elect to pull a LVLT trick and get capital at the cost of a dilutive offering of more common shares. You can imagine how that'll affect the price of the share, now that the share represents a smaller slice of the pie. Not good.
Looking over the numbers, I'm getting a very bad feeling about that. Yes, GX may survive - but I think that the odds of a dilutive event have just risen dramatically. What has me worried is the following: the new guidance represents a far steeper cut than I expected, and more importantly, if they come in at the lower band of that guidance, than I think a dilutive event is almost a certainty. Which is where an investor may conclude - the likelyhood of the shareprice going down (because of the dilution) is greater than the likelyhood of the shareprice going up - so the way to profit is by shorting not going long... hey, Sherlock, maybe that's why the short position is so huge and climbing<ggg>! The bet is obviously (look at the short position and the sinking price of the common shares) that the most likely event is the dilutive offering. That is a different question from: will GX survive. GX's survival chances are reasonably good - and the way bonds trade are an indication of that (bond holders take precedence over common shareholders). But at what cost? Here the common shares tell the story - the bet seems to be: at the cost of dilution, so naturally, the price falls, as the value of the shares will shrink on a % basis. Bottom line: if you are investing in GX common shares, you should ask not only "will GX survive", but "at what cost to the common". How to make that decision? Obviously, the economy will have some impact - and here you simply have to forecast the economy. But more important is: even in the best of economic scenarios, why has GX given such a sharp cut to their outlook and guidance? The numbers speak for themselves.
Anyhow, I'm not trying to push you in any direction, make your own determination based on your DD. I'm treating GX primarily as a trading vehicle at this point, and I'm very careful not to tie myself up into a "long term" investment of the common. That represents a change from some time ago, where I thought of GX as both an investment and a trading vehicle. After this size of the guidance cut in the latest CC, I now think it is a trading stock, until the horizon clears somewhat, and I see where the earnings are going, and how they intend to deal with their capital needs. Frankly, I don't think there is any great incentive to treat GX otherwise. GX has also crossed my line in the sand of closing below $6. This means to me that the prospects of a recovery to above $10, even under very good circumstances have just diminished drastically. So, no hurry to "invest" in GX. If suddenly GX is on an uptrend and everything becomes "blue skies ahead", I'll have plenty of time to simply hold on to a long trade and add to it. No need to tie up unnecessary funds. It is not like GX will gap up overnight by 50%, so why tie up too much? I have been long overnight for the past few trading sessions, but I always took profits along the way (and posted that, as I did when I took profits at $7.25). I will continue to do so, and not overweight myself with a dead and sinking "investment". If it becomes investment-safe, there'll be more than enough time to become an investor as opposed to a trader. The risks of being an "investor" are clear - those who hold GX from $40 and above can attest to that. All IMO.
Morgan
P.S. I have not researched MTP enough to make any remarks about them. |
