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Wiring Small-Town Surfers Could Recharge This ISP OneMain.com's stock is valued below its peers'. Yet it may deliver faster-than-expected growth as it caters to loyal small-market customers As the red-hot Internet sector cools down, investors have an opportunity to pick up shares of companies that seem to have fallen too far as the glow from their initial public offerings faded. In that light, OneMain.com (ONEM), an Internet service provider focusing on rural and secondary markets in the U.S., is worth a look. OneMain is valued well below its peers but is showing signs it can grow faster than Wall Street expects. Lead underwriter BT Alex. Brown raised OneMain to a Strong Buy on May 24, calling it "our favorite stock in the Net-centric services area," mainly because of its "extremely compelling valuation." At its most basic level, OneMain is a play on the roughly 50 million Americans expected to flood online over the next three to four years. It is also a play on consolidation expected in the industry as many of the nearly 5,000 independent ISPs join up with nationwide providers. And, digging a little deeper, it is a bet that a strategy of providing localized Internet service to loyal customers in small markets could ultimately prove highly profitable. "NOT A ROLL-UP." OneMain went public at $22 a share on Mar. 24, and much of the $215 million the IPO brought in (the largest Internet deal in dollar terms at that point) went to buy 17 ISPs across the country. Since then, OneMain has already announced it's buying two more ISPs: The Grid added 35,000 subscribers in the San Luis Obispo area and a deal for Feist Internet Services, announced on May 26, adds 12,000 subscribers in the Wichita area. The ISPs will operate quasi-independently under the OneMain brand, providing subscribers with local content and emphasizing service, says President and CEO Stephen Smith. OneMain's subscriber base now totals 418,000, up from 332,000 at the end of 1998. Smith, a former investment banker with Morgan Stanley, acknowledges that OneMain does benefit from "positive arbitrage" by paying from $175 to $500 a subscriber (depending on the nature of the deal), when the value per subscriber at the IPO was $1,100. But, he insists, "we're not a roll-up," referring to companies that grow by consolidating fragmented industries. He says the company's target is 15% internal growth each quarter. While nationally, 28% of homes have Internet access, Smith says penetration in some of OneMain's markets is only 10% -- but growing quickly. "There is evidence that rural markets can have higher penetration," says Kevin Moore, an analyst with BT Alex. Brown, who compares OneMain's strategy with that of Wal-Mart Stores (WMT). "In New York you have a lot of stuff to do besides surf the Internet," he says. Smith believes customers in smaller markets will prove more loyal, partly because they have fewer options. (AOL is a long-distance call in 50% of the company's markets, says Smith.) OneMain's churn rate is between 2% and 3%, while industry churn is 4% and 5%, say analysts.
The cloud over dial-up ISPs should dissipate as companies report stronger-than-expected earnings over the next six weeks and investors see that their subscriber growth is stronger than that of broadband providers, says Youssef Squali, an analyst with Ladenburg, Thalmann & Co. A COMMON BRAND. Meantime, OneMain's stock is a lot cheaper than its competitors'. OneMain shares are currently valued at roughly four times estimated 1999 revenues, or less than $1,000 per subscriber, while its peer group trades at seven times '99 revenues, or $1,700 a subscriber, says Fred Moran, an analyst at ING Baring Furman Selz. If OneMain was valued with its peers, it would trade at over $30 a share, he says. That doesn't even include its potential to grow through acquisition. Some analysts have set price targets as high as $50 a share. "They just came public," says Chris Tuttle, an analyst with SoundView Financial Group who rates the stock a Strong Buy with a $50 target price. "They will have to build a track record." And for this year, he says, "it appears that what we will see will be strong numbers." OneMain's first-quarter results were ahead of analysts' expectations in terms of subscriber growth, revenues, and EBITDA (earnings before interest taxes, depreciation, and amortization), a measure of cash flow. On Apr. 29, the company reported revenues of $19.5 million and a loss of $21 million, or $1.02 a share. Excluding noncash charges, including $21 million in amortization of acquisition-related expenses, the loss would have been $578,000, or 3 cents a share. Smith says the company should meet or exceed analysts' estimates next quarter. That's not to say the stock doesn't have plenty of risks. OneMain still has to prove it can integrate the ISPs and benefit by converting to a common brand, billing system, and network platform, says Squali. Like many Internet companies, it isn't expected to be profitable for years, and overhead costs will climb this year. But with its unique strategy for expanding its subscriber base in small markets around the country, OneMain should have a good chance to make up lost ground. Amey Stone is an associate editor of Business Week Online _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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 Amey Stone covers the markets and investing for Business Week Online | |||||||||
