In times like these, it’s easy to develop tunnel vision as we watch telecom stocks spiral downward. So let’s step back and see where valuations are now for USA based, non-ILEC, longhaul and metro fiber providers. I have compiled a quick list and calculated estimates of their current valuation based on Q2 cash and debt levels plus any known major changes since then (e.g. for XOHO). Where available, I used the lowest value for 2008 EBITDA given by guidance, else my own estimate – thus assuming some deterioration in Q3/Q4 but nothing immediately horrible. Corrections are welcome, but don’t take my EBITDA numbers as a projection – it’s just for a rough valuation. The cashflow situation comment is my opinion, such as it is.
| Symbol | Market cap | Net Debt | EV | 2008 est Ebitda | EV/ Ebitda | Cashflow Picture |
|---|---|---|---|---|---|---|
| LVLT | 2,280 | 6,158 | 8,438 | 950 | 8.9 | Neutral to Slightly positive |
| XOHO | 44 | 590 | 634 | 103 | 6.2 | Slightly negative |
| CCOI | 222 | 173 | 395 | 65 | 6.1 | Positive |
| GLBC | 764 | 1,029 | 1,793 | 320 | 5.6 | Neutral at best |
| FTGX | 51 | 8 | 59 | 11 | 5.4 | Slightly positive |
| TWTC | 960 | 1,040 | 2,000 | 390 | 5.1 | Positive |
| PAET | 156 | 800 | 956 | 224 | 4.3 | Positive |
| ITCD | 121 | 240 | 361 | 85 | 4.2 | Neutral at best |
First we should keep in mind that Level 3’s (LVLT) EV/EBITDA ratio is skewed upward by its high debt level relative to marketcap, as is that of XO Communications (XOHO). If we look at the others which are more comparable, we see that the sector is now consistently valued at an EV/EBITDA level of $5-6.
Perhaps the greatest fall has been that of Cogent (CCOI) which in May checked in at a ratio of over 15, but part of that can be attributed to pricing issues specific to Cogent. Yet they still manage to top the list after Level 3 and XO. The most shocking valuation here to me is that of TW Telecom (TWTC). Yes, I know everything is down hard, but TWTC ought to be at least valued higher relative to its brethren given the fact that it is now profitable, generates copious amounts of cashflow, and appears to be in no danger at all. Their sole vice is apparently to have admitted seeing spreading softness in September, something that now seems somewhat, err, what’s the word? Oh yeah, obvious.
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Categories: Financials · Internet Backbones · Metro fiber
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rob;
this is great stuff. i bought some TWTC and Q (more of this due to the divvy). in fact Q is trading lower than when everyone thought they were going to go BK – yet their bonds today trade much higher relatively speaking. not sure how much lower things are going to go but there is plenty of stuff a crazy values if you look out. thanks for your work!
jeremy.
Thanks Jeremy. For additional comparison purposes, I have added Paetec to the table with an EV/EBITDA of 4.3 – much like ITCD.
Does anyone have others to include in this list?
Rob,
How would you relate this to consolidation in the industry ? Who are most likely merger candidates ?
Morty
I think that barring an infusion of $ from big money somewhere, M&A is off the table for the near future. None of these companies is going to be willing to sell themselves at these share prices, all think they have better days ahead and no pressing needs.
Did you adjust net debt to reflect the market price of the debt? That is, if debt trades at a 20% discount, did you use 100% of the debt or 80% when calculating EV?
No I didn’t discount the debt to market value, and for two reasons. 1) A buyer of a company wouldn’t be able to get the current market price of the debt, and 2) market prices of those securities are hard to find and unreliable when found. Of those above, only LVLT really has debt traded frequently enough to make it possible, and finding recent enough quotes on their dozen different bonds involved would be a task even I shudder to attempt.
However, your underlying point is well taken that this might give a more accurate count of the street’s valuation of each company, if someone were to manage it.