From Barrons
Fiber Kings Have Fallen -- to Bargain Prices
By Rivka Tadjer
Earlier this year they could do no wrong. Now, it seems
they can't do anything right -- at least as far as the market is
concerned.
The major independent builders and
operators of fiber-optic voice and data
networks are taking a beating on Wall Street
these days, like other technology stocks:
They have lost anywhere from one fourth to two-thirds of
their value over the last few weeks.
The four companies in question -- IXC Communications,
Qwest Communications, Level 3 Communications and
Williams Cos. -- plan to build a total of 63,000 new miles
of fiber optic networks by next year, increasing the amount
of fiber optic cable in the world by more than 60%.
That promise, which rang investors' bells just a few months
ago, now is looking more like an albatross. Investors seem
more worried that these companies won't find customers
for all the fiber they're laying. More immediately, they're
concerned that the recent tightening of credit and turmoil in
the high-yield bond market (upon which these operators
tend to rely for financing) may cause the money to run out
before their huge capital-intensive projects are completed.
But lately some analysts have recommended nibbling at
these stocks again. They say the demand for digitized audio
and video on the Internet and corporate networks is
increasing dramatically. And as bandwidth becomes king,
operators of efficient fiber optic networks hold the keys to
the kingdom.
"Even just long distance phone
calling over data networks is
causing a huge demand for
fiber optic networks," says
Richard Klugman, telecom
analyst at Goldman Sachs &
Co. "Qwest's promise to
deliver to consumers long
distance calls for 7.5 cents a
minute, for example, is quite
compelling."
And at current low valuations, the risk is clearly limited,
the bulls say.
IXC, for example, has lost two-thirds of its value since
March. Once touted as being ready to give AT&T, MCI,
and Sprint a run for their money, its stock is now trading at
20 ¾, down from 62. Level Three and Quest each are off
around a third from their highs, while Williams -- which
still gets most of its revenue from its cash-cow natural gas
business -- has lost 27% of its value since July.
The central issue is financing these terribly expensive
networks, which, except for Williams', are all at about
half-built right now. With credit getting tighter, that appears
to be a genuine concern. But not to Klugman of Goldman
Sachs, which recently upgraded Qwest to Market
Outperform from Market Perform and IXC to the firm's
Recommended List from Market Outperform.
"I don't believe any of these companies will have
difficulties on the financing side and [in] meeting their
deadlines," he tells Barron's Online. "Qwest and IXC, for
example, are on similar schedules, and most of the
segments of their networks [are] either complete, or the
hard, dirty work is done. Remember, Qwest is historically
a construction company -- this is their core competency."
Qwest is trading at 107 times estimated 1999 earnings of
29 cents a share, according to Zacks, while IXC is
projected to lose $2.76 a share next year. But both
companies are selling at low multiples to EBITDA --
earnings before interest, taxes, depreciation and
amortization. (EBITDA, an approximation to operating
cash flow, is often used instead of earnings to value
companies that are losing money because of massive
capital spending.)
At current prices, Qwest and IXC change hands at only
about eight times estimated 1998 EBITDA and at a mere
four times next year's projected EBITDA, according to
Thomas Friedberg, senior equity analyst at Janco Partners,
Inc. And operating cash flow growth should be robust:
Friedberg expects both these companies' EBITDA to at
least double next year.
He's particularly high on IXC. "The price has been
depressed surrounding financing, and the company in
previous quarters hasn't made projections, but we will see
a strong second half," he says, adding that he expects all
these companies to meet their construction deadlines.
"There's nothing to worry about in terms of those networks
getting built. "
Williams' stock has lost the least, the analysts agree,
because of its deep-pocketed parent company and recurring
revenues from the natural gas business. Its network is also
furthest along, being three-quarters complete. (Williams
just announced a deal with IIXC, in which the two
companies agreed to share the construction costs of a new
250-mile fiber-optic route connecting Dallas to Houston.)
The stock closed at around 27 on Monday.
Of course, once the networks
are built, these companies
will have to sell
telecommunications service,
primarily to business
customers. And, Klugman
acknowledges, the incumbent
long distance carriers do
indeed have established brand
names in selling network
services to corporate
America, where the demand for high-speed data networks
is heaviest and most immediate.
But with the low-cost service these carriers provide, they
are already beginning to make some headway against the
big names. "Qwest has greater than a $2 billion backlog for
carrier and commercial services," says Friedberg, "which
will take them through the next year or two."
Investors may also need some patience to get their rewards
from these stocks. But at their current prices it may be
worth the wait.
|
