In what some will see as a somewhat surreal event, metro fiber specialist abvt announced yesterday that they will effect a two-for-one stock split on August 20 in the form of a 100% stock dividend. They just got listed on the NYSE back in May after an epic crawl out of the MFN bankruptcy back in the last bubble. The company’s stock has been trading in the neighborhood of $80 despite the economic turbulence, so they certainly have the room to pull it off. The market has welcomed them back, and hence the split. But having this particular company doing it while the rest of the sector continues to suffer is particularly ironic. Abovenet also announced that the board of directors has announced the restatement and extension of their shareholder rights plan, a form of poison pill, which was set to expire this week.
Now intellectually, stock splits don’t matter to me. If an applie pie has eight pieces where it used to have four, it is nevertheless still a pie and its filling still has the same number of apples. But emotionally it is important. Most of the stock splits in the sector in the past year have been of the ‘reverse’ variety, meaning that the stock price had fallen so low that institutional holders might not want to hold a penny stock and there was also a danger of being delisted. While many people mistake cause for effect, having a reverse stock split is not a time of celebration.
But Abovenet’s split was of the other kind, one representing progress, increased investor interest, and burgeoning valuations. In other words, it’s one we haven’t seen much of since the last bubble popped. How can they pull off a stock split while valuations remain so low across the entire technology sector? It’s the quality of the fundamentals that underlie the metro fiber business now. They are driving cash flow, growth, and improving margins despite the worst recession in many decades. We haven’t seen more of them mainly because there are so few public pure metro fiber companies, and those we do have (TW Telecom (NASDAQ:TWTC, news, filings), ftgx) are still working off the splits of the previous bubble amidst similarly improving fundamentals.
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Categories: Financials · Metro fiber
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AboveNet’s management has done a great job rebuilding the business while, until recently, laboring in the obscurity of the pink sheets.
One asset they have that not everyone is aware of is a deferred tax asset that will shelter a substantial amount of income over the next few years. As I understand it, their tax basis in the assets exceeds the book basis (see page 52 of the 10-K filed in March, showing a deferred tax asset of over $400MM). So they have substantial tax depreciation available to shelter income for the next few years. Not an easy thing to value but the end result is more free cash flow. This deferred tax asset is in addition to the NOL’s, which have limited value because of tax code restrictions on using NOLs after a change of control.
Was there a change in control?
They reorganized under Chapter 11 – hard to believe a tax attorney would knot up the NOLs in a restructuring of debt.
The split demonstrates the confidence in optical demand and metropolitan fiber optic infrastructure business models which are Data and IP focused.
The AboveNet financial results and margin strength, low churn is typical of this model. Once you start adding applications and dependency of Type II circuits margins get squeezed. Too much complexity and points of failure.
It would be nice to see Wall Street start distinguishing the value between companies that own fiber optic sheaths over other models. I believe AboveNet over the next few quarters will clearly demonstrate the superior value of this model of “highly reliable connectivity” and competitive advantages.
I keep hearing about the next great thing … Cloud Computing. Cloud Computing will fail if customers do not have diverse and “highly reliable connectivity.” The cloud is ahead of itself – think connectivity and bandwidth as the needed enabler to be in place first. If a customer can’t get to the cloud what good is the cloud?
Splitting makes the stock more attractive to new investors.