good article Pam, thanks. Here's a report from Governali: "CLECs: Second Quarter 1998 Operational Statistics"
(from last week)
==================
CLEC growth remains extremely strong. In the second quarter, results generally met or slightly exceeded expectations. Operations are improving in terms of predictability, sustainability, and the ability to meet customer requirements. This report includes the most important operational statistics for the group, as well as comparable valuation statistics. A new addition to our statistical compilation is a table tracking markets of operation for the top 16 CLECs, including AT&T and WorldCom. Despite the recent underperformance of the CLEC sector relative to the broader market, we remain bullish on the group. Our top picks remain: ESPI, GSTX, HYPT, ITCD, NXLK, and WCII. The underperformance in the group can probably be reversed through further consolidations and mergers. We think these are likely to occur in the relatively near term for fundamental and stock price reasons.
Summary
Operational Statistics Roundup. During the second quarter, overall, the CLEC group posted strong growth trends. Access line growth continues to be quite robust. Thus far, the CLECs from which we collected data (including AT&T and WorldCom) added over 553,000 access lines this quarter versus 775,000 business access lines added by the RBOCs and GTE. The CLECs added fewer lines than our 616,000 access line estimate as WorldCom added 85,000 lines versus our estimate of 150,000 while the RBOCs and GTE topped our estimate of 634,000 business lines. In addition, the CLECs continue their rapid network buildout programs. As Table 4 indicates, the group continues to make progress across the board.
Markets Served. Tables 5-12 give a quick snap-shot of the various markets in which the top 16 CLECs are currently offering services. Information on this basis is not as easy to come by as one might think. Different companies define markets differently. And, some companies don't give out the cities in which they operate. Thus, this is a data base that will continually need updating and refinement. However, we feel confident that the information presented is largely accurate and reflective of the state of industry development.
Recent Stock Price Performance Has Lagged the Broader Market Despite
Operational Gains. Since the end of the first quarter, the CLEC average stock price has declined approximately 23% versus the S&P 500 which is down 0.9% and the NASDAQ which has declined 0.2%. The CSFBC CLEC Index includes all CLECs which are publicly traded during the given performance period.
As such, this most recent performance period (March 31, 1998 - August 20, 1998) includes the greatest number of CLECs. The average that we use here is calculated as a simple average not a capitalization weighted average of most publicly traded CLECs including the following: ADG, ARTT, ELIX, ESPI, GSTX, ICGX, ICIX, ITCD, MCLD, NXLK, RCNC, TGNT, USNC, and WCII. As we noted in our CLEC Second Quarter Preview piece (dated June 30), we believe that this underperformance is due to three factors: 1) the lack of M&A transactions; 2) general volatility in the market which puts more pressure on these kinds of stocks than others; and 3) the increased awareness by the market of the risks and challenges which all CLECs face as they build out their networks. In a sense, investors seem to be applying higher discount rates to the cash flow estimates, reflecting awareness of greater operating risk, and greater stock market risk. Despite the recent weakness, we are still bullish on the group.
On a year-to-date basis, the CLECs have slightly outperformed the market. The CLECs are up 13% since the beginning of 1998 versus a 12% rise in the S&P 500 and a 16% rise in the NASDAQ and just a 8% increase in the Dow Jones Industrial Average. While underperforming recently, the CLECs are still up significantly over the last twelve months. Using the same calculation for average CLEC performance, the group has posted a 44.7% rise versus a 16.2% advance for the S&P and a 12.5% advance in the NASDAQ. Our top picks in the group, driven by our DCF analysis, are ITC DeltaCom, NEXTLINK, Hyperion, GST, e. spire, and WinStar.
The germane question regarding the stocks at this point is: what will get them moving again? Clearly the fundamental opportunity for the CLECs has not changed at all in the recent months. In fact, regulatory and judicial decisions have actually improved the operating environment. In addition, the consolidation among the LECs actually raise the need for facilities outside the footprint of the new merged companies. Thus, from both an operational standpoint and a asset value standpoint, the environment is actually better for the CLECs than it has been before. So, again, what will get the stocks moving? We think the most credible catalyst will be acquisitions and consolidation among the CLECs. With about 20 CLECs now trading, there are too many companies, without enough differentiation.
And, since there haven't been mergers recently among the CLECs there are rising concerns about the value of the assets. So, the best thing that could happen to the stocks would be a round of consolidating mergers. We think this is very likely for two reasons. One, scale will help the operating performance of CLECs. And, two, there is a shortage of good management. So, we are optimistic about the prospects of mergers within the group over the next several months, which we think will get the stocks going once more.
As many CLECs have underperformed the market since the end of the first quarter, the decline in prices has created several bargains. Relative to our DCF-derived price targets, the following CLECs represent strong upside values. e. spire Communications (ESPI): The company continues to post strong access line growth, which is driving top line revenue growth.
The stock has held up better than its peers, posting a 8% rise since March 31 versus the 8% decline in the group. Our year-end 1998 price target of $26, represents potential upside of 33%.
GST Telecommunications (GSTX): The company continues to improve its
operating performance. In addition, we applaud the company's recently
announced plan to redirect its focus on the core telecom business as
evidenced by its recent divestiture of NACT and an aggressive emphasis on reducing costs and eliminating non-essential businesses. Despite all of this, GST shares have declined 21% since March 31. Our year- end DCF-derived price target is $22.
Hyperion Telecommunications (HYPT): The company posted strong second
quarter results driven by the second highest sequential growth rate in
total access lines installed in the CLEC group. In addition, HYPT's
recently announced plan to acquire long haul capacity from several carriers to interconnect its markets should enhance revenue growth, improve margins, and improve returns on capital. HYPT shares have declined 42% since May 5th. While much of the loss is indicative of the relative weakness in the broader market, part of the decline is also reflective of the weakness in recent IPOs. Our year- end price target is $25.
ITC DeltaCom (ITCD): The company continues to strongly outperform the
group, posting a 39% stock price increase since the end of the first
quarter. The company recently announced plans for two new growth
initiatives that include an expansion of its network and the opening of four new retail markets in Texas by the end of 1999. Our year-end price target is $58, and ITCD is one of our top picks of our entire coverage.
NEXTLINK Communications (NXLK): NXLK shares have outperformed the market, rising 10% during the period, versus the 8% average decline in the CLEC average. The company's strong performance is due in part to its recent announcement (July 20), that it would invest in a jointly owned long haul fiber network that should enable accelerated entry into the data market and interconnection of local networks and owned facilities. Our year-end price target of $45 represents a 27% potential gain.
WinStar Communications (WCII): WCII shares have declined 22% during the period. The company reported second quarter results in line with
expectations. Equally important, however, WCII revealed a variety of
fundamental achievements that should allay concerns about the efficacy of the company's wireless strategy and its ability to execute its plan. Our year-end 1998 price target is $61.
Companies Mentioned: Advanced Communications Group (ADG, 8.06)
Allegiance Telecom (ALGX, 10.63)
Colt Telecom (Colty, 179.00, Hold)*
Electric Lightwave (ELIX, 10.25)
e. spire Communications (ESPI, 19.59, Buy)
GST Telecommunications (GSTX, 12.00, Buy)
Hyperion Telecommunications (HYPT, 10.13, Buy)
ICG Communications (ICGX, 25.13, Hold)
Intermedia Communications (ICIX, 32.31)
ITC DeltaCom (ITCD, 44.75, Buy)
McLeodUSA (MCLD, 37.25, Hold)
MGC Communications (MGCX, 11.25)
NEXTLINK Communications (NXLK, 35.44, Buy)
RCN Corp. (RCNC, 21.63)
AT&T (T, 56.31,R)
U S LEC (CLEC, 19.88)
USN Communications (USNC, 3.88)
WinStar Communications (WCII, 33.38, Buy)
*Covered by a different CSFBC analyst |
