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Technology Stocks : INSS - International Network Services -- Ignore unavailable to you. Want to Upgrade?

To: Glenn D. Rudolph who wrote (283)	12/21/1997 4:08:00 AM
From: Trey Yon	Respond to of 446

Warm fuzzy reading :-) related link: lehman.com Headline: International Network Svcs: Upgrade to 1-Buy Rating Author: Karl Keirstead,(212)526-0442,P.Burton,x4881 Rating: 1 Company: INSS Country: COM CUS Industry: COMPUT Ticker : INSS Rank(Prev): 2-Outperform Rank(Curr): 1-Buy Price : $16 15/16 52wk Range: $39-15 Price Target: $30 Today's Date : 12/16/97 Fiscal Year : JUN ------------------------------------------------------------------------------ EPS 1997 1998 1999 - - QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr. 1st: 0.04A 0.09A 0.09A 0.13E 0.13E - - 2nd: 0.05A 0.10E 0.10E 0.15E 0.15E - - 3rd: 0.06A 0.11E 0.11E 0.16E 0.16E - - 4th: 0.08A 0.12E 0.12E 0.17E 0.17E - - ------------------------------------------------------------------------------ Year:$ 0.24A $ 0.42E $ 0.42E $ 0.61E $ 0.61E $ - $ - Street Est.: $ 0.43E $ 0.42E $ 0.58E $ 0.61E $ - - $ - - ------------------------------------------------------------------------------ Price (As of 12/15): $16 15/16 Revenue (FY98): 157 Mil. Return On Equity (97): 15% Proj. 3yr EPS Grth: 45.0 % Shares Outstanding: 34.5 Mil. Dividend Yield: N/A Mkt Capitalization: 570 Mil. P/E CY98; CY99: 33.3 X; 23.6 X Current Book Value: $2/sh Convertible: - -Debt- to-Capital: 0% Disclosure(s): C ------------------------------------------------------------------------------ * We are upgrading our investment recommendation on INS shares to a 1-Buy from a 2-Outperform. INS shares have declined about 25% since we initiated with a cautious near-term outlook in mid-September. * We have recently spoken with INS's largest customer (AT&T Solutions) as well as several public and privately-held competitors. We believe that INS is the clear leader in an industry (network services) with better near-term and long-term prospects that virtually any other technology services sector. * We believe that 2Q98 has started very strong and that INS will meet or beat Street expectations. INS also has very low (less than 5%) exposure to Asia-Pacific and little exposure to potential Y2K spending dislocation. * At 33 times CY98 EPS, INS is trading considerably below its peer group, which trades at about 35-40 times, despite faster EPS growth and stronger industry fundamentals. * In summary, INS has been a great company but a disappointing stock since going public. At these trading levels, we expect the INS share price performance to better approximate the company's superb operating results. ------------------------------------------------------------------------------ In mid-September 1997, we initiated coverage of INS, the leading provider of consulting and integration services for enterprise networks. The demand for consulting and network systems engineering services is huge (growth of 30-50%) given the rapid increase in network equipment spending, the shortage of qualified in-house talent and the demands being placed on LANs/WANs to accommodate mission-critical applications. INS is the only publicly-traded company in the network services marketplace. In our view, the network services industry has better near-term and long-term prospects that virtually any other technology services sector. We believe that the industry is growing at 30-50% per year, while INS grew by 79% in the most recent quarter. In about a dozen recent conversations with direct and indirect competitors, we cannot find a single voice projecting slowing industry growth, and most privately-held competitors view INS as the industry model. INS is viewed within its fragmented industry as Cambridge Technology (CATP - $35; not rated) is viewed within the rapid software development space. Based on recent conversations with AT&T Solutions (INS's largest customer), we believe that the carriers will continue to be major customers of INS. The carriers are all attempting to grow their network outsourcing units, and access to the expert INS network systems engineers is a critical component to their plans to add scale without adding significant fixed costs. One of our concerns in mid-September was the potential for revenues from Sprint (one of INS's largest customers) to slow following Sprint's acquisition of Paranet, a privately-held desktop/network services company. We do not believe that Sprint revenues have slowed, and now believe that INS revenues from MCI (a large Paranet customer) have increased following the Paranet acquisition by Sprint. We also understand that several key Paranet employees have left the firm following the acquisition. The network services industry remains supply-constrained, has attractive (15%) and rising operating margins and INS has the largest pool of network systems engineers. In addition, INS has little (less than 5%) exposure to Asia-Pacific, and the network services industry has relatively little exposure to potential Y2K spending dislocation. We believe that growth in spending on other technology services (perhaps custom software development) may slow in 1998 as customers make room for significantly higher Year 2000 conversion and replacement costs. INS growth prospects are NOT significantly impacted by the slowing demand for new network equipment. 2Q98 Looks Strong As previously indicated, we have confirmed with INS that 2Q98 has had a strong start, continuing the momentum from the end of 1Q98. We are very comfortable that INS will meet or beat analyst expectations in the quarter. Valuation is More Compelling At 33 times our CY98 EPS estimate of $0.51, INS shares are trading at a considerable discount to Cambridge at 38 times, Sapient (SAPE - $51 3/4; not rated) at 39 times, and Whittman-Hart (WHIT - $28 7/8; not rated) at 42 times. In our view, the industry fundamentals and company outlook for INS is at least as good as any of these companies. We base our 12 month price target of $30 on a multiple of 40 times CY99 EPS of $0.72. In summary, INS has been a great company but a disappointing stock since going public. In our view, the risks going forward (primarily future venture capital distributions of about 3 million shares) are outweighed by the fundamentals described above. BUSINESS DESCRIPTION: International Network Services is a provider of services for complex enterprise networks. ------------------------------------------------------------------------------ Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities.