FTGX

Fibernet Telecom (FTGX) Earnings

Several subscribers have asked about our thoughts on FTGX’s latest earnings report. In short, the report almost exactly matched our forecasts for the company. Our estimates for 20%+ top-line growth and the potential for nearly 50%+ EBITDA growth in 2008 remain intact. In other words, FTGX’s business fundamentals are extremely strong and the company continues to benefit from a robust industry environment.

The issue, of course, for investors is whether the stock price already reflects these improving results. As always, it’s difficult to answer that question, which is why “The Market” is so difficult to forecast. What is clear is that the stock is nowhere near as cheap as it was when we first recommended it. However, it is also true that the company is still valued at a substantial discount to its peers. Relative valuation, though, is always tricky, because you need to consider the option that the comps (i.e. EQIX, SDXC etc.) themselves are significantly overvalued.

In sum, our best guess is that at the current price levels, FTGX’s risk/reward seems about even based on a strictly rational analysis. However, there is always more to a stock price than just fundamentals. In the case of FTGX, since only one analyst on Wall Street currently covers the company, we still believe the stock is somewhat undiscovered and the supply/demand for the shares is still very favorable. Furthermore, it’s conceivable that analysts could justify a much higher EBITDA multiple on the stock given the company’s growth relative to peers, thereby greatly increasing the target price on the stock. And while we do not recommend betting your money on the potential for hyped-up price targets, the prospect of such an outcome here has us holding onto our shares for now, especially considering our continued belief that the downside here is somewhat limited given FTGX’s takeover potential.

Note: We own shares in FTGX, and first recommended them to paid subscribers at $4.30 per share. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. Furthermore, we maintain no responsibility to update our report on FTGX or inform you of our position in the stock at any time in the future.

Potential Upside For Our Fibernet Telecom (FTGX) Estimates

This morning Fibernet Telecom (FTGX) announced a colo expansion at 60 Hudson Street in New York City. Since the company was quickly reaching full capacity in its existing colo space, we view this news as very significant, in that it has the potential to provide significant revenue and EBITDA growth, over and above our existing 2007 projections for the company. Importantly, FTGX funded this expansion with existing cash balances and did not take on any additional credit.

We will need to wait for the company’s fourth quarter 2006 results, expected to be released later this month, before fully revising our 2007 and 2008 estimates to reflect this increased colo space. However, we now are more confident in our initial assumptions for fiscal 2007 where we have the company reporting revenues of $50 million and EBITDA of $8 million. Notwithstanding FTGX’s above-average expected EBITDA growth in 2007, simply using the average industry EV/EBITDA multiple of 15X, implies an upside price target of $12+ for FTGX shares, assuming the company meets our projections. However, upside could be more significant should our estimates prove to be too low.

Note: We own shares in FTGX, and first recommended them to paid subscribers at $4.30 per share. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Fibernet (FTGX): Merriman Curhan Ford Initiates

We were pleased to see that Merriman initiated coverage of Fibernet  Telecom (FTGX) this morning with a Buy rating and an $8.25 – $9.50 price target.  We have not had a chance to review the report in detail, but we should mention that we think the analyst’s numbers are too low and that FTGX will hit the analyst’s 2008 numbers in 2007.  Notably, the analyst’s free cash-flow numbers are absurdly low given that FTGX’s annualized FCF from the last quarter  is  already double the analyst’s 2007 numbers. Finally, there is little discussion on FTGX’s replacement value, which we  value at over $10. Overall, the low-ball numbers should help propel FTGX shares higher in 2007, as management is able to exceed these estimates, as we expect.

Note: We own shares in FTGX, and first recommended them to paid subscribers at $4.30 per share. All ideas, opinions, and/or forecasts, expressed or implied
herein, are for informational purposes only and should not be construed
as a recommendation to invest, trade, and/or speculate in the markets.
Any investments, trades, and/or speculations made in light of the
ideas, opinions, and/or forecasts, expressed or implied herein, are
committed at your own risk, financial or otherwise.

FiberNet (FTGX) and Investing in Volatile Stocks

Guy, a subscriber, comments:

I highly respect the job you did of analyzing Interap and showing how undervalued it was. FTGX also appears way undervalued and yet it has dropped over 10% since what I think is a pretty strong report showing the company is on the verge of turning things around financially.

However, there is a big difference between INAP and FTGX, in that Internap has very valuable IP. INAP holds numerous patents on finding and using the best possible route across the internet, which it uses for its unique performance IP offering as well as its FCP box. I don’t see anything equivalent with FTGX. Furthermore, Internap is a company with global scope, with PNAPs in England and Asia and Canada, as well as throughout the US. FTGX is a small company with presence in just two (admittedly important) markets.

Finally, what is the gross profit margin at FTGX and will this increase? And to what extent are they gaining new colo customers? The market certainly seems very skeptical of FTGX – for reasons I don’t quite understand. I know that you like to find company’s that represent little downside risk to capital but it looks like an investor in FTGX, even now, will have to stomach downswings of 10-20%. This is something that will keep my investment very small for the time being.

Envoy Global Research Responds:

We agree with Guy’s analysis. INAP is a different company than FTGX in certain ways, and it is not a perfect comp for valuation purposes. But, INAP and FTGX share one very important similarity: the colocation business. In our view, it is the colocation business that is driving profits at all these IP Services companies, including INAP (before the VitalStream acquisition), and therefore there does not seem to be a reason why FTGX should be trading at such a discount to its peers given the high valuations afforded by Wall Street to all of the colocation companies. At the same time, we are well aware that colo is still a small part of FTGX’s revenues (20%), and therefore one needs to apply a discount to industry multiples when valuing FTGX as a whole.

In addition, even though INAP may have valuable IP assets, we think that FTGX’s metro fiber assets are potentially more valuable than IP, given the always questionable legal status of IP. However, metro fiber, given its status as a real estate asset, is almost always beyond doubt. We doubt they are going to build any more major carrier hotels in NYC/NJ any time soon, so FTGX’s fiber and positioning is significantly more valuable than the current market price implies.
In any case, the best way to value FTGX is by comparison to other carrier’s carrier companies, such as Looking Glass and Telecove, both of which were recently acquired by industry giant, LVLT. While it is difficult to get exact EBITDA figures for these companies, since they were private and LVLT somewhat obscures the cash-flow data, the valuations based on revenues are more transparent. From what we gather, Looking Glass with $75 million in revenue was acquired for 2.2X Enterprise Value to Revenue (EV/R). Telcove, with $390 million in revenue, was acquired for over 3X EV/R. We believe that Looking Glass is the best comp for FTGX given its size and the almost exact same business makeup (IP Transport + Colocation).

Therefore, assuming $40 million in revenue for FTGX, and using the Looking Glass multiple, one is forced to conclude that in the event of an acquisition, FTGX would be worth about $9 per share. Even at a significant discount to Looking Glass, FTGX should be worth $6 or a slight premium to tangible book value. These prices also appear quite reasonable, as paying 2X revenue for a recurring revenue stream with a stable base of customers is certainly justifiable.

So why is FTGX trading down? Well, we plead ignorance when it comes to understanding the stock market’s short-term price swings. But, it is important to mention that in the micro-cap stocks that we follow, such major price swings are quite common. This is why we always only invest a small amount of our entire portfolio in each individual small cap opportunity and why we stay extremely diversified in these types of investments.

Some money managers insist that you need a concentrated portfolio of stocks to outperform the market, and while that may be true if you actually have a say in the business, such concentration will surely lead to ruin when investing in small caps as a passive investor. The stocks are just too unpredictable and at some point you will take a 50% haircut.

Furthermore, the notion that concentration leads to outperformance is simply wrong when it comes to investing in small cap, turnaround stocks. Our real-life experience, and that of other successful investors, is exactly the opposite. Extreme diversification will lead to significant outperformance when the right types of stocks are chosen and one pays careful attention to valuation. The bottom line is that one needs to stay very diversified in turnaround and restructuring investments, if one intends to profit from the huge returns that a portion of these investments will ultimately provide.

Chatting with Jon A. DeLuca, CEO of Fibernet Telecom

We continue to believe that companies with high-replacement cost fiber
in metro areas are best positioned to benefit from the consolidation
wave sweeping the IP Transport and Colocation services market. As such
we were pleased to have recently had the opportunity to chat with Jon
A. DeLuca, President and Chief Executive Officer of FiberNet Telecom
Group (FTGX), a company that owns strategic metro fiber assets in key
US cities. While FiberNet’s cash profits are on the upswing, Fibernet’s
stock (FTGX) still trades at a significant discount to fully-diluted
tangible book value, and therefore appears to offer a low-risk way to
invest in the growth of the metro fiber and IP Services markets.

Internap’s Earnings Are Bullish for FiberNet Telecom (FTGX)

Last evening, Internap, the biggest winner in our portfolio this year, reported outstanding quarterly results and once again raised estimates for 2006. The company now expects EBITDA of about $25 million and revenues of approximately $180 million in 2006. Internap’s stock rose to a 52-week high following the announcement. Internap now sports an enterprise value (EV) of about $585 million and trades for 23X EV/2006 EBITDA and 3.2 EV/2006 Revenue.

What is interesting is that Internap is a big customer of FTGX, and as such what is good for Internap must also be good for FTGX. In fact, we think that Internap, ex-VitalStream, remains one of the few publicly-traded companies that could be used as a comp. for determining a fair valuation for FTGX.

FTGX is expecting about $40 million in revenue and $5.2 million in EBITDA in 2006. Even applying discounts to Internap’s multiples, as detailed above, one can clearly see that FTGX remains extremely undervalued at current levels, trading at less than 9X EV/2006 EBITDA and at only 1.2 EV/2006 Revenue. Based on Internap’s results and Internap’s current share price, our fair valuation for FTGX therefore remains about $10. This price implies a valuation of 17.5X 2006 EBITDA and 2.3X 2006 Revenue.

Note: For our initial report on FTGX, please Click Here

FiberNet Telecom (FTGX) Delivers

This morning FiberNet Telecom (FTGX) reported outstanding results for the third quarter of 2006. Notably, Fibernet reported free cash-flow (defined as EBITDA minus interest minus cap-ex) of nearly $1 million on $10.4 million in sales. Sales jumped 20% year-over-year and EBITDA rose 160% as compared to 2005, showing once again that the company’s business model has excellent operating leverage.

New Stock Pick: Fibernet Telecom (FTGX)

FiberNet Telecom (Nasdaq: FTGX). FTGX, is a highly-leveraged, micro-cap company, based out of New York City, that provides broadband transport and co-location services to over 240 clients. The company’s stock currently trades at about $4.30, down from a five-year high of over $100, and a two-year high of nearly $10. We believe the company is in the midst of a successful and sustainable turnaround in operations, and given the low valuation of its shares relative to recent M&A multiples in the sector, we think investors should be aggressively buying stock at current price levels or lower.

Financials Are Improving Dramatically
We’ve been following FTGX for quite some time, and we finally became interested in the company following the last quarterly earnings report. In the quarter, EBITDA was $1.2 million, up 207.2% from $0.4 million reported in second quarter of 2005 and up 30.6% from $0.9 million for the first quarter of 2006. Furthermore, in looking at the company’s 10Q, it appears that FTGX broke even on a cash-flow basis, after taking into account capital expenditures and interest expenses. We saw what happened to Internap’s stock when the company started turning the corner on a cash-flow basis, and we think that FTGX is now in a similar position to where Internap was about a year ago.

Valuation is Cheap
What makes FTGX even more interesting is that the company’s market valuation is still low when one takes into consideration industry valuations based on the recent M&A activity in the company’s industry and valuations given to FTGX’s competitors. With the stock trading at an over 50% discount to our expected value, we think the shares are very attractive at these levels, despite a recent run-up from $2. It is also worth noting that the company’s tangible book value on a fully diluted basis is about $6.00 per per share. It’s not often that we find a company in a hyper-growth industry, with improving company-specific financials, trading beneath tangible book value.

Upside Potential Far Exceeds Downside Risk for the Shares
Overall, we think that the supercharged industry backdrop, including recent acquisition activity, a generally positive outlook for bandwith transport pricing over the next year, and the continued financial improvements that we forecast at the company over the coming quarters, more than compensate for FTGX’s high debt level and dismal past operating performance.

We believe that as the company continues to report increasing EBITDA and cash-flow growth over the coming twelve months, Wall Street will finally wake-up to this developing turnaround story, and send the stock soaring. In a worst case, should the stock remain at low levels, we would expect management to put the company up for sale to a larger competitor. Any sale would likely be at significantly higher prices, making the stock a worthwhile investment at current levels or lower.