Wednesday, Friedman, Billings, Ramsey downgraded tw telecom inc. (TWTC) shares to Market Perform from Outperform with a price target of $12. The brokerage lowered its 2009 EPS estimate to $0.05 from $0.27.
Analyst David Dixon noted that TWTC reported better than expected first quarter results but provided a cautious outlook for 2009, reflecting macro trends, weak enterprise demand, product substitution, and pricing pressure.
The analyst said that results were largely ahead of consensus and his expectations, driven by solid execution amid a difficult environment and reflecting the relative resiliency of the telecom services subscription-based business model. The $10 million acquisition of a metro fiber asset (plus ancillary assets) in early first quarter is augmenting customer growth.
The analyst added that adjusted EBITDA exceeded expectations due to the combination of higher revenue and higher gross margin but was partially driven by a $2 million deferral in merit pay increases to second quarter of 2009. Enterprise revenue momentum in second quarter of 2009 is a key focus, and management conveyed a cautious tone, consistent with meeting on March 12.
Although first quarter of 2009 is typically a seasonally weak quarter, the analyst has not extrapolated the revenue growth rate, as he does not believe there has been a pickup in business demand at this juncture.
The analyst said that the company typically sees revenues from new contract signings after a 60-day to six-month buildout following a new contract, suggesting lower first quarter of 2009 signings will be evidenced in second quarter and third quarter of 2009.
The analyst believes shares are fairly valued in the $12 range, and moderating revenue trends may limit near-term upside potential. The analyst downgraded the stock to Market Perform but would expect the shares to respond positively to any evidence of revenue momentum as part of a recovery scenario, which he believes it is too early to call.
Currently, TWTC is down $0.27 or 2.33% and trading at $11.34.
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