A decade ago, investors were willing to pay any price for a company associated with the internet. It didn’t matter whether the company made money or not – or even whether they had projections for eventually turning a profit. Instead of earnings, investors looked at eyeballs, unique users, revenue growth, and plenty of other less important variables. Analysts who believed that stock prices were too high were ridiculed as a “new age of investing” made old ratios and metrics obsolete.
But as is usually the case, fundamental valuations eventually became important and many of the high-flying internet darlings came crashing back to earth. Some of the companies that were hit particularly hard (many of which had to declare bankruptcy), were the fiber companies which invested in the infrastructure which carried information across short or long distances. The investment in these networks was huge and unfortunately, the companies couldn’t stick around long enough to reap profits from their ballooning costs associated with the network buildout.
Today, the picture is a bit different. ”Dot com” investors who got burned at the turn of the century are leery of making the same mistake twice. And so legitimate bandwidth companies who are turning a healthy profit are largely snubbed by the investment community as the industry has fallen out of favor. Such is the case with Abovenet Inc. (ABVT) which provides bandwidth and fiber optic infrastructure to telecom carriers as well as individual corporations. The stock only trades about 110,000 shares each day so it is widely overlooked by Wall Street, but the company carries a market cap of $1.5 billion and has posted profits for the last 13 consecutive quarters.
ABVT has had a strong run since the panic days of early 2009. In fact, after trading below $15, the stock is now as high as $62 – more than a 300% return in just over a year’s time. But despite the strong run the stock has experienced, it looks as if there is a good bit more room for investors to realize a profit. When the company reports fourth quarter earnings in the coming weeks, it is expected that Abovenet will have generated $3.84 per share in earnings per share. That’s a gain of 122% over the last year. And the company’s growth should continue into 2010 although the rate will likely be much slower. Given the stock price of about $62 and 2010 expectations for $4.12, ABVT is trading at an attractive multiple of just 15 times forward earnings.
Looking at the business, I’m impressed with the wide variety of customers Abovenet deals with. In a February presentation, the company noted that 28% of its customers were telecom carriers while 72% of its customers were other enterprises. The broad range of clients include major brokerages and insurance companies, media firms, and other businesses which have high bandwidth needs. And since ABVT typically engages in long-term contracts, its visibility for revenues and earnings is very appealing.
An issue that typically plagues infrastructure companies is capital spending. In order to provide quality service and expand its network, the costs of laying fiber and developing a worldwide network can be prohibitive. But Abovenet has been disciplined with its roll-out and as of the third quarter 2009, the company had realized earnings that exceeded the capital expenditures for the year. With these statistics and a low debt level, investors can be confident that ABVT is handling capital decisions responsibly and shareholder value is being protected.
The broad market picture is unclear right now. Macro issues such as Europe debt, China tensions, and high domestic unemployment continue to hamper recovery. In 2010, equity markets have been weak, and yet the charts are becoming difficult to read as rebounds cast some doubt on the bearish thesis. Investors must work through uncertainty and will likely do best with a long/short approach where capital is committed both to solid growth stories such as ABVT as well as to short opportunities where stocks are over-valued and sentiment is likely to fall.
ABVT should be an attractive candidate for the long portion of a growth oriented investment strategy. A recent pullback offers an attractive entry point and technical traders could set a stop just below $55 where the stock found support earlier this month. Risk control remains an important skill to develop, but if traded properly ABVT could offer significant profits.
FD: Author does not have a position in ABVT
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