Guidance & Visibilty

[madrose1]

Adjusted for Reality, Neither Rackspace nor Equinix Shine
http://online.barrons.com/article/SB50001424052748704852604578298122496488026.html?mod=BOL_twm_col#articleTabs_article%3D1

Feb 13th

RACKSPACE IS AN EXCELLENT company with a real, growing business; it added an amazing 7,900 customers in the quarter. But it makes nowhere near enough money to support its stock valuation. Its entire appeal is conjecture: potential future profit.

At a recent price of $59, Rackspace trades at 58 times the $1.01 per share it is projected to make this year. Most of its cash, moreover, is eaten up by capital investments, such as buying more servers, developing software to run clients' operations, or buying land.

The Street, on a good day, looks past all that, disregarding both reported profit and actual free cash flow. Instead, investors focus on metrics that imply the company can earn a lot more at some point, when it can cool its spending.

Known as "adjusted Ebitda" (earnings before interest, taxes, depreciation, and amortization), adjusted free cash flow, or adjusted funds from operations (FFO), these figures suggest to the Street the imaginary pre-tax profit that Rackspace and Equinix could pay out if they were REITs. Neither currently pays a dividend.

The companies do their best to keep the Street viewing them from the adjusted-number perspective. Rackspace noted last week that in the 12 months ended in December, it would have had adjusted Ebitda of $464 million, or $3.29 per share, after adding back its depreciation and amortization. On that basis, the stock's trailing multiple of 18 times is below its growth rate. That's a 5% earnings yield, which if it were paid out as a dividend, wouldn't be bad.