In December I updated Ramblings' Competitive Telecom Trends data and charts, and we looked at where EBITDA margins, capex, and proxy cash flow have been going for competitive network operators across the sector. Today let's finish up with a quick look at valuation as represented by the ration of Enterprise Value to EBITDA. Here is the graph, looking back a number of years and ending with a current estimate.
Relative Valuation (EV/EBITDA) for Competitive Network Operators
The theme we have been seeing lately is that it's not so much who owns how much fiber and at what level, but whose path forward has the most credibility. The market gives credit to the group with valuations of around 10+ for demonstrating an interesting future. It still sees those in the mid range as treading water, and holds some doubt about the long term prospects of those below that.
Finishing the year in its usual lofty position was Cogent Communications, which has combined 30%+ EBITDA margins and low capex rates to pay out strong dividends. But joining them up there this past year has been the upstart GTT, whose valuation peaked in the first half but has fallen back lately. GTT also maintains a low capex profile, leaving the transport layer to others. The markets have been trying to figure them out all year, and I'm not sure they've come to a consensus just yet.
Level 3's burst of positive earnings and free cash flow over the last year or two has been met with a slight rise in valuation back above 10, but not so much that it can be called surprising. They always got credit for the potential to get to where they are now, but now that they have 2016 should be an interesting test. Meanwhile, Zayo rightfully joined the top group here above 10 after going public 5 quarters ago. They've lost a little of the initial honeymoon the market gave them, but kept most of it. We'll have to see what the international expansion via Viatel and Allstream does to their overall trends this year.
The next EV/EBITDA tier is down around 6-7, where Windstream, Consolidated Communications, and Lumos Networks sit. All three have some ILEC history and offsetting growth and churn trends. Lumos in particular has been getting very little credit for the amount of resources it has been shifting to the fiber side of its business lately. Their capex has been very high relative to revenues as they invest in new network in new territories, and one might expect that should start to affect the way people see the company one way or the other. Windstream's valuation was volatile around the CS&L spinoff (there may be some data artifact there for Q2 and Q3) but then settled back to the same range. They spun off a fair fraction of EBITDA, as we saw in their EBITDA margin trend, but the EBITDA they have left is getting valued at the same level. I haven't followed Consolidated too closely, but the small honeymoon following the Enventis acquisition has clearly evaporated.
And then there is EarthLink, with an EV/EBITDA ratio below 5 still, but up from the mid 4s it was mired in last year. They got into this side of the business by acquiring Deltacom, One Communications, and some other assets, and their initial plan to make those assets into something cloud-services-oriented foundered initially. Since then, EarthLink has been having a good run in 2015 by most accounts, but while the change has been positive it hasn't really shifted the perception needle all that far. To get the same sort of credit for the EBITDA they generate as others in the sector they'll need to do more than clean up past mistakes, they'll need to demonstrate a path forward or find an alternative. Their former neighbors in this valuation range have mostly been acquired, shifted models or been taken private (think CBEY, Paetec, XO, ITCD, IQNT, GLBC).
But on the other hand, the trend across the sector in 2015 itself was for EV/EBITDA to fall slightly from the start of the year. The exception to that rule was EarthLink, actually.
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