Finishing up this week's look at comparative financial metrics for competitive fiber operators, let's look at relative valuations via a plot of EV/EBITDA through the end of the third quarter. Of course, since the end of Q3 several things have happened such as Earthlink's purchase of Deltacom, a flurry of movement due to the Level3/Netflix deal, and XO's proposed rights offering and optimistic guidance. This graph uses EBITDA for the trailing twelve months harvested from regulatory filings, it does not use projections or guidance - and thus the EV/EBITDA ratios tend to be higher than analysis that does attempt to look forward. Ok, enough talk, here's the plot:
Between Q2 and Q3, not that much happened. AboveNet saw the biggest increase, while TW Telecom, Cogent, Global Crossing and PAETEC each saw slightly higher valuations as well. But Level 3, XO, and CBeyond, saw slight declines. As for Deltacom, its valuation stayed constant through the end of Q3, but the very next day its stock priced doubled due to the Earthlink buyout, and that EV/EBITDA ratio was 5.5, or similar to those of XO and Paetec - meaning Deltacom is no longer lagging the field!
I get many questions about why Level 3 tops this chart every quarter despite its travails over the past 3 years. Much that position is an artifact of the high levels of debt that this calculation values at par. If Level 3's stock price went to zero, this calculation would still give it an EV/EBITDA ratio of 7! Their debt doesn't always trade at par, I just can't reliably track its market value here. That being said, Level 3 will always get some sort of premium due to the asset base they are sitting on, and the heretofore unlocked potential they represent.