Paine Webber on WCII from last week (increasing price target to $62):
28 APR 99 06:58 WINSTAR: MOVES TO UNLOCK VALUE
DOCAUTHORS: John Hodulik
TICKERS: WCII,CBS,
CURRENT RATING: 2 CLOSING PRICE: $50.13
CURRENT FY EPS EST: $-15.38 (was $-14.34) NEXT FY EPS EST: $-14.79 (w FY End=December
Competitive Local Exchange Carriers; Internet
PaineWeInfrastructure
John Hodulik April 28,
Winstar Communications
Rating: Attrac(WCII-$50.13)(2)
WINSTAR: MOVES TO UNLOCK VALUE KEY POINTS
* Recent moves by WinStar management have been made to unlock the value its telecom and new media properties.
* The company's core telecom business is geared up to add an increasing number of on-net lines over the next few quarters, improving its profitability and better leveraging its valuable fixed wireless capabilities.
* On the new media side, WinStar recently sold a one-third equity stake in Office.com, a WinStar's online property, to CBS in exchange for $42 million in promotion and advertising. The agreement could provide a stepping-stone for further cooperation between the two companies and may presage a public offering of Office.com.
* The value of the company's wireless assets was highlighted in recent
acquisitions of wireless cable companies by WorldCom (WCOM-$87.63)(2)
Sprint (FON-$106.38). We believe these transactions suggest that fiber based providers will increasingly look to wireless technology to help extend the reach of their fiber networks and better leverage investment in back office systems.
* We are maintaining our first quarter estimates for revenue of $83.6
million and EBITDA losses of $83.4 million. The company will report first quarter earnings on May 12 and will provide better insight to the remainder of the year. Maintain Attractive rating on WinStar shares.
* We are raising our price target for WinStar shares from $42 to $62 based on expectations for strong performance in the second half of 1999 and further strategic developments that should work to enhance shareholder value.
Key Data Quarterly Earnings Per Share (fiscal year ends
Decem52-Wk Range $51-13 1998A 1999E Prev 2000E
Eq.Mkt.Cap.(MM) $3,910 1Q ($2.59) ($3.97) (3.75)
Sh.Out.(MM) 78 2Q (2.77) (3.94) (3.55)
Float 45% 3Q (3.36) (3.83) (3.49)
Inst.Hldgs. 68.5% 4Q (3.80) (3.64) (3.54)
Av.Dly.Vol.(K) 1,890 Year ($12.53 ($15.38) ($14.34) ($14.79) ($14
Curr. None/N FC Cons.:
Div./Yield A
Sec.Grwth.Rate 30% Revs.(MM) $247 $405 $686
:
12-mo. Tgt $62.00 P/E: NM NM
NM Price
12-mo. Ret. 23.7% EBITDA: ($225) ($298) ($133)
Pot'l
Convertible? Yes
Debt/Capital: 33.0%
12- mo. 26.0%
PricePerf.:
INCREASING PRICE TARGET TO $62 PER SHARE
We are increasing our price target on WinStar shares due to
expectations improving performance in the company's core business and
strategic developments that should work to enhance shareholder
value. Additionally recent transactions in the fixed wireless space have highlighted the value of these assets to carriers that need to establish a comprehensive local service footprint ahead of Bell entry into long distance.
GEARING UP FOR THE SECOND HALF
Our main focus in evaluating WinStar's core telecom business is its
ability to add "on-net" access lines. In the third quarter of 1998, the company added 60,000, total access lines, however, only 17,000 used the company's wireless networks. In the fourth quarter, total line additions increase 62,000 but on-net adds were essentially flat.
Going forward, WinStar is gearing up to increase the number of lines it to its wireless network each quarter. The success of the company's
Project Millenium promotion combined with spending to ramp up its
provisioning capabilities should push these install rates higher. For
the first quarter we are expecting net adds of 65,000, with 20,000-25,000 on-net lines provisioned. In the second quarter, on-net net adds should come in close to 25,000. Meanwhile total line additions should stay flat at 65,000 per quarter. As these on-net lines produce gross margins as high as 80% of revenues, the increasing mix of these lines should begin to positively affect the company's profitability, boosting margins and moving the company toward positive EBITDA in 2001.
WINSTAR LINE STATISTICS
4Q98 1Q99E 2Q99E 3Q99E
Total lines 319,000 384,000 454,000 534,000
Net additions 62,000 65,000 65,000 65,000
On-net additions 17,500 23,000 25,000 28,000
Source: PaineWebber and company data.
CBS ACQUIRES 33 1/3% OF OFFICE.COM
CBS (CBS-$46.38) acquired 33 1/3% of WinStar's on-line business
service,Office.com. In exchange, WinStar will receive $42 million in
promotionsadvertising from CBS across all of the company's media venues.
Due to CBS' broad audience, the company's involvement should be instrumental in driving new customers to the sight in its early development. Office.com allows WinStar to expand its Internet services to its business customers while also providing broadband connectivity. WinStar launched the site in August 1998, but the complete site is expected to be available during the third quarter of 1999. Office.com will offer content based products and the latest information on business trends and current events.
The company hinted that it may conduct an IPO of Office.com in the near future, possibly as early as this fall. The strategic investment from CBS increases the likelihood of a successful offering and fits the mold of recent transactions where a larger, better established player has come in to bolster the valuation prior to the deal.
THE VALUE OF SPECTRUM
Within the last month, both WorldCom and Sprint announced acquisitions
of MMDS (multichannel multipoint distribution services) companies, so-
called "wireless cable" operators. WorldCom will purchase CAI Wireless, a provider with spectrum in 35 primary markets in the U.S., for $408 million. It follows on the heels of a similar $103 million acquisition of PeopleChoice TV by Sprint.
CAI and People Choice are small companies that have recently emerged
from bankruptcy following the meltdown of the wireless cable industry. In the late 1980s, these companies aligned with Regional Bell Operating Companies to provide competition to Cable MSOs in the delivery of subscription television services. Technological issues and a lack of customer demand caused many of these partnerships to unravel and forced many wireless cable operators to operate as niche services in underserved cable markets.
Both WorldCom and Sprint are expected to use this spectrum to deliver
broadband connectivity to small and medium-sized businesses and
households. Wireless cable spectrum is located in the 2 GHz range and is capable of transmitting signals to receivers up to 30 miles away.
However, the limited amount of spectrum allocated in this band (generally 200 MHz per market) makes it difficult to offer two-way, broadband services such as those contemplated by Teligent and WinStar.
We see these transactions as a way for WorldCom and Sprint to test the
wireless waters. These companies continue to look at all available
means to reach customers without resorting to leased last mile connections from incumbents. While the spectrum is likely to gain approval for two-way services, it is not expected to offer the ubiquity or throughput that WinStar and Teligent's spectrum provides.
CONCLUSION
WinStar is taking several steps to create value out of its online
properwhile focusing on the performance of its core telecommunications
business. We are maintaining our Attractive rating on WinStar shares while raising our price target to $62 per share based on our revised discounted cash flow analysis that employs a 15% cost of capital, an 11x 2008 EBITDA exit multiple and 20% public market discount.
RISKS
Risks to the company include ability to execute, increasing competition, changes in technology, potential adverse regulatory rulings, high financial leverage and continued dependence on the capital markets. |
