Global Crossing Ltd. (GX)
1S (Buy, Speculative)
Mkt Cap: $5,254.6 mil.
August 7, 2001 COMPANY DESCRIPTION
Global Crossing, based in Hamilton, Bermuda, has built the
TELECOMMUNICATIONS world's first independent global undersea fiber network,
SERVICES providing not only country-to-country connectivity but
Jack B. Grubman city-to-city connectivity to more than 200 of the largest
metropolitan markets around the world. Global Crossing's
network connects Asia, Europe, and the Americas and is
complemented by terrestrial capacity in the US, its Pan
European Crossing and joint ventures with Marubeni in
Japan and Hutchinson in Hong Kong, among other terrestrial
builds. Since its inception, Global Crossing has evolved
into a full service provider, offering a full suite of
telecom products (voice and data) and focussing on large
institutional and corporate enterprise customers.
Global Crossing trades as GX on the NYSE, and its 57%
owned subsidiary Asia Global Crossing trades as AX on the
NYSE.
FUNDAMENTALS
EPS (12/00A) ($2.11)
EPS (12/01E) ($3.32)
EPS (12/02E) ($3.46)
P/E (12/01E) NA
P/E (12/02E) NA
TEV/EBITDA (12/01E) 7.6x
TEV/EBITDA (12/02E) 5.4x
Book Value/Share (12/01E) $11.65
Price/Book Value 0.5x
Dividend/Yield (12/01E) $0.00/0.0%
Revenue (12/01E) $6,430.1 mil.
Proj. Long-Term EPS Growth 0%
ROE (12/01E) (29.3%)
Long-Term Debt to Capital(a) 50.5%
Convertible Yes
GX is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (8/6/01) $5.93 Rating 1S
52-Week Range $25.75-$6.55 Target Price $30.00
Shares Outstanding(a) 886.1 mil.
First Call Consensus EPS: 12/01E ($3.17); 12/02E ($3.19); 12/03E NA
INVESTMENT THESIS
We believe Global Crossing is a low risk way to participate in the growth
sweet spot of the telecom industry---international voice, data, and IP
services---which are being driven by global deregulation adding a multitude
of new telecom operators who need undersea fiber capacity. Despite concerns
of a capacity glut, we continue to believe that subsea is one of the
bottlenecks in the industry. In telecom services, one has to have a network
to drive product, which drives revenues and cash flow. In the subsea world,
where demand far outstrips supply by increasing degrees, it is clear to us
that Global Crossing's global network is becoming a factory off which to
drive a full range of products from carrier capacity sales through
commercially driven ATM, frame relay and IP services.
We realize that the entire sector is under pressure, but the reality is that
those companies that are building the right network assets with the right
products to get to the right revenue mix and which happen to have assets that
represent the particular bottleneck assets in the entire value-chain should
drive disproportionate amount of value in this industry. We think Global
Crossing is the epitome of that.
RECENT RESULTS
Global Crossing reported second quarter results lighter than expected and
lowered guidance for the remainder of 2001. Specifically, Global Crossing
reported $1,620.4 million of cash revenues from continuing operations (pro
forma to exclude Global Center and the ILEC assets), up 0.4% sequentially and
below our $1,684.2 million estimate. In addition, recurring adjusted EBITDA
was $472.3 million (about a 29% margin), about 8% better than Q1'01 adjusted
EBITDA of $441.2 million (a 27% margin), but below our $475.7 million (28%
margin) estimate.
Overall Telecom Services cash revenues were $1,457.6 million, up 2.8%
sequentially and 24.9% year-over-year (on a pro forma basis), below our
estimate of $1,544.2 million (8.9% sequential growth and 32.3% YOY).
Data came in at $904.6 million, accounting for 62.1% of Telecom Service
revenue in the quarter, versus 63.0% in Q1'01. Of the $904.6 million of data
revenue, $337.4 million represented non-capacity sales, so about 37.3% (an
increase of 80 basis points from 36.5% in Q1'01 but below our $400.2 million
estimate) of Global Crossing's data revenues are up the value stack from pure
capacity sales which is a 44.5% increase over the revenues from a year ago.
Data cash revenues were up 1.3% sequentially and 40.1% YOY.
VALUATION
Our $30 target price is based on our 10 year DCF, in which we assume a
terminal year adjusted EBITDA multiple range of 8 - 10x, a 15% discount rate,
which net of the company's current net debt position, implies an equity value
of about $30 per share.
RISKS
As Global Crossing's management noted itself in recently lowering its
guidance for the second half of 2001, the economy is slowing and the company
is clearly effected by this environment. However, as we have noted, the
company actually upped its guidance for capacity sales, suggesting that
demand for subsea capacity remains strong. Additionally, Global's foray into
the corporate enterprise market could be slower going than anticipated.
Historically it has been difficult to gain significant market share given the
dominance of WorldCom Group and AT&T in the Corporate Enterprise sector---
although Global's reach is indisputably unmatched and it continues to make
progress in landing new contracts. Finally, while the company continues to
estimate that it is fully funded to free cash flow positive in its current
business plan, this depends largely upon reaching relatively significant
growth in 2002. Although we believe that the company's goals are well within
its reach, a continued period of economic sluggishness could force the
company to raise additional capital. |
