Replies to post #8 on Broadwing (BWNG)

[Learning2vest]

eastunder(Sydney?),

My first thought after hearing Doc Huber declare his estimate of a $5.5 bil "replacement value" on Broadwing was that he was communicating his "minimum bid" requirement for anybody interested in opening a serious "buy out" negotiation.

After noodling on things awhile, my conviction moved on to consideration of another possibility, something that would actually ride incognito on that first assumption.

Huber has gotten away with playing "outside the general rules" in a lot of ways, but undervaluing and over-depreciating the Broadwing assets could become a drag if he needs to "pony up" for a big loan at reasonable rates.

What to do? Well, putting a bigger number out there can't hurt IMO. I think he was seeking to do a couple of things that would play well in his game. Nudge the BWNG share value closer to reality and clarify the true asset value at the same time.

Those comments are from a "loan value" perspective. My very limited experience leads me to think that the stock market's valuation of an equity works in many very different and mysterious ways. The P/E trend is a good place to start, but things seem to go off in every direction from there.

You asked about available "unlit" capacity to sell, but all this interested observer can say is that there appears to be plenty of high margin incremental revenue potential ahead at Broadwing. How much, I have no clue.

One "common sense" thought that I had after watching streets get torn up to bury fiber just about everywhere in recent years was, "If somebody is spending the money to rip up every Main Street around the globe, I sure hope they are stuffing all the fiber optic cable they will EVER need down into those ugly ditches before covering them over."

Seeing a few dimwit yokels acting out their version of the "Wall Street Analyst" role by attempting to use the percent of that fiber utilized to say anything else just registers "Tilt!, Dip Stick" on my feeble mind.

There is plenty of excess capacity in the ground IMO.

[kron7777]

I don't think Huber wants a buyout. Not at these prices anyway.
So I don't put too much thinking about why he mentioned that number. Maybe he wanted to brag. Or he wanted to enlighten Wall Street as to how undervalued the stock is (looks like someone paid attention). Or maybe he had nothing else to say.
It doesn't matter.
You will hear that nobody cares about replacement values and it is market that decides what it worths. The problem with this argument is that market is irrational: the same network was worth $100 mln two years ago and will be worth $10B if people realize there is so much capacity and the demand is unlimited.
Take oil for example: say you owned an oil fields with 1 billion barrels of oil underground with cost of extraction of $10. It is year 2000 and oil is trading at $10. So you won't make any profits if you start pumping. And all the talking heads tell you that oil is never going to trade above $12. Market would value those fields at , say, $2B. Fast forward 5 years: oil is at $60 and all the same talking heads predict it will only go up. So market values the same fields at $60B.
Same with Broadwing. It was impossible to make money up until now so the network was worth a little. If the demand exploads (and it will) , prices will improve and the network will be a money making monster machine.

Also you might hear that equipment is cheap now and if someone want to build the same network it will costs only $200 mln.
What they don't realize that expertise is priceless. They invested millions of hours to fine tune the network and make it the most efficient one. Yes, the equipment might cost $200 mln, but the performance of such network won't be cost effective and problems will occur constantly. And after they spend $200 mln for equipment and installation and $5 bln for millions and millions of hours of work to make it work, they will have the same network. Like buying an old car for $500 and then spending every weekend fixing it.

I don't know percentages of lit fiber, but it is very high. Highest in the industry. So if they need to provide extra badnwidth , they won't have to lit anything for some time.

I think that 4% you mentioned is not percentage of lit fiber, but percentage of utilization of the network. Maybe it is 10% now, I dunno. They can increase revenues by 1000% and most of that money will go directly to the bottom line. You can calculate what the share price will be if that happens.
I can give you a hint: if they grow revenues by 100%, they will be earning some $300-500 mln a year. $5-8 per share. Which will translate into $200-$300 share price.
And if they will grow revenues by 15% annually, it is just 5 years away.