Having looked at the relative trends in EBITDA margin, Revenue, Capex, and EBITDA-Capex across a selection of public fiber-based competitive telecoms, it is now time to take another look at valuation trends. In other words, how has the market’s perception of these companies changed in response to the movement of these various metrics, both collectively and individually? First a few details:
- I am still basing this on 2009 EBITDA estimates as of the time of each measurement – the latest datapoint being Friday 11/27. You can find 2010 projections from any analyst spreadsheet – including my own – I just do not feel comfortable actually putting my name on any of them just yet.
- I will still present Enterprise Value using both the market value of debt and the absolute value, but because the financial crisis has eased and most debt is trading near par the graphs don’t look so different anymore – mostly just for Cogent Communications (NASDAQ:CCOI, news, filings) and Level 3 Communications (NYSE:LVLT, news, filings) which still have a fair amount of debt trading below par.
With no further ado, here is the latest update:
As you can see, the overall upward trend in sector valuations remains intact, however since September the rally has faltered a bit. I think this simply reflects the fact that hopes of a powerful and quick recovery amongst network providers have faded. But only somewhat, every one of these companies is leaner and meaner and ready to take advantage when demand surges – the problem is figuring out when that will be.
On an individual basis, the situation diverges. The metro specialists Abovenet and TW Telecom have continued to gain favor with the market, as have the less fiber-intensive CLECs Paetec and Deltacom to a lesser extent. Both trends are deserved. The former have been outperforming the sector reliably, while the latter have survived the recession in much better shape than many people expected.
But the companies with a more substantial focus on longhaul IP and fiber services all lost favor in the past few months: Level 3, Global Crossing, XO, and Cogent. That’s not a trend I had recognized until putting together this chart. I discount XO’s movements, as they are tied more to Icahn’s actions than to anything operational. But as for the other three, what is the common thread that the market is paying attention to? Their operational performance has not been particularly similar of late. Perhaps it is the pricing pressure for IP services in Europe (especially in the East), to which all three are exposed? I’d be interested in any thoughts.
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Categories: CLEC · Financials · Internet Backbones
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Great stuff, a few thoughts.
If we enter into a period of tight credit like we had 12 months ago I would expect valuations of companies with and without near term debt maturities to diverge. The tight ABVT/TWTC grouping would diverge.
I am wondering what the baseline EV/EBITDA is for the overall telecom industry, ie $T =$VT + Telefonica + BT + NTT. Overall, telecom has lagged in this recovery and I suspect these companies strongly outperformed the overall telecom market.
The other competitive value factor often ignored relative to fiber ownership is the uniqueness of the fiber routes. If you had 3-4 carriers “joint build” a route to “save capex money” they are now in continuing price wars on those routes.
Another value factor as an extension of the point above is network diversity — we are in an IP world — at a minimum customers of significant size or mission critical businesses require at least 2 separate, physically diverse fiber optic network providers to avoid service affecting outages.
Another value factor are routes that were sold by companies in fire sale situations where the costs of an IRU were less than the cost to build. These same routes are loaded with competition and irrational behavior.
Most analysts believe all fiber networks are the same — when they are not. You can usually separate the wheat from the chaff just by watching margin growth (not top line growth by itself – any idiot can cut margins for top line growth).
Fiber is like retail – location, location, location.
Rob;
i wanted to see how you did your calculation for LVLT. It’s lower than mine. Here’s my formula as of a few days ago?
=((6186859700-810000000)+(1639775248*1.21))/913014000
((mv debt-cash)+(shares outstanding * price))/my ebitdas estimate
this give me 8.06 quite a bit higher than what you get. Please advise….also thx 😉 been waiting for this update!!!
here’s the debt schedule:
leases+derivatives 30,000,000 30,000,000
6% 10 110,583,750 111,000,000
2.875% 10 ($7.18) 44,620,000 46,000,000
7.043% 11 2,820,000 3,000,000
10% 11 ($3.60) 175,010,000 172,000,000
10.75% 11 3,000,000 3,000,000
5.25% 11 ($3.98) 184,417,500 201,000,000
3.5% 12 ($5.46) 218,437,500 250,000,000
12.25% 13 574,030,000 548,000,000
15% 13 ($1.80) 421,000,000 400,000,000
9% 13 ($9.99) 279,276,500 295,000,000
9.25% 14 1,113,330,000 1,258,000,000
term loans 14 1,679,000,000 1,679,000,000
mortgage 10/15 68,000,000 68,000,000
7% 15 ($1.80) 185,553,200 196,000,000
4.601% 15 217,500,000 300,000,000
7% 15 ($1.80) 287,031,250 275,000,000
8.75% 17 593,250,000 700,000,000
6,186,859,700 6,535,000,000
MV FV