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In the market's current state of edginess, the Street takes no prisoners in cases where companies warn that they won't meet analysts' expectations. Shares of such companies get punished swiftly. So when PSINet (
PSIX
), a provider of Internet access and related products to large companies, lowered its second-half revenue and cash-flow forecasts on Friday, Sept. 15, its stock quickly tumbled. It landed at 11 3/4 a share, down from 15 earlier that same day. The stock has continued to slip and is currently at 9 as analysts cut their estimates and lowered price targets. The stock traded as high as 60 in early March.
But in Wall Street's quirky logic, some pros now deem the stock as an opportunistic buy. The reason: They believe PSINet will be in play as a takeover target.
Aside from offering Internet connectivity, PSINet also provides Web-design and hosting, remote-user access, and voice-over-Internet telephony services. The company blames the downbeat outlook on the lower-than-expected e-business prospects of its customers and the less-than-estimated demand for Internet access. Management told analysts that revenues in the second half of the year will come in at about $920 million to $960 million, rather than the $1 billions analysts had expected. The company also said it will need an additional $600 million next year to expand its network of Web-hosting centers.
A BARGAIN? By Monday, Sept. 18, analyst Thomas Watts of Merrill Lynch cut his projection for earnings before interest, taxes, depreciation, and amortization (EBITDA) for the second half to $2.6 million from $14.1 million. And he scaled back his revenue estimate to $940.2 million from $976.6 million.
But some Street pros are eternally open to a bargain. "At its current price, PSINet has become very undervalued," says Sven Monberg, special situations analyst at Starr Securities. PSINet, which has a market cap of $1.9 billion, is trading at just 2.3 times trailing 12-month revenues of $827 million, he notes.
Companies in similar businesses, such as Exodus (
EXDS
) and Digex (
DIGX
) have heftier multiples. Exodus, with trailing 12-month revenues of $483 million and a market cap of $24 billion, has a multiple of 51 times revenue. Digex, with a market cap of $3.5 billion and with trailing 12-month revenues of $108 million, trades at 32 times revenues. Monberg says the total value of PSINet's assets are worth much more than the current stock price.
MORE DEALS. And he expects consolidaton in the industry to accelerate, as evidenced by WorldCom's recent $6 billion acquisition of Intermedia, (
ICIX
), a leading provider of integrated communication-network services. Monberg says more major telecom carriers will make acquisitions in the Web-hosting area. He figures that PSINet's Web-hosting operations alone are worth at least 30 times annualized sales of $100 million, or $3 billion, based on the current multiples of Exodus and Digex.
PSINet's core ISP (Internet service provider) unit, which provides Internet access to other ISPs, carriers, and big corporations, is worth an additional $3.2 billion, based on four times annualized revenues of $800 million, estimates Monberg. Another unit, which includes the recently acquired Metamor/Expedior, which specializes in e-business consulting support, plus PSINet's venture-capital portfolio, are worth $1.5 billion more. In sum, these assets combined are worth $7 billion to $7.5 billion, or 30 to 35 a share, says Monberg.
Broadwing (
BRW
), the former Cincinnati Bell that had acquired IXC Communications in 1999, owns a 16% stake in PSINet. Another big holder is PSINet Chairman and CEO William Schrader, who owns 9%. Some pros say Broadwing, Qwest Communications (
Q
), and Deutsche Telecom (
DT
) would be the likely suitors. These companies are all eager to expand their operations in the areas that PSINet is in, say these pros. Adds Vik Grover, an analyst at investment firm Kaufmann Brothers: "PSINet will likely not remain independent" for long, if its valuation remains at its current low levels.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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