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AboveNet (ABVT) has three main revenue service segments: Metro, WAN, Foreign, and Fiber infrastructure (which accounts for 40% of sales). Most of the company’s revenues arise from its U.S. operations, but overseas expansion is proceeding rapidly. We are highlighting this company because It has “must-have” assets: namely, fiber-optic networks in more than a dozen U.S. cities. Since it is in the perfect “sweet spot” as to where corporate growth is right now, it should be one of the highest and most consistent top-line growth stories in the telecom industry.

Overseas expansion is vigorous, too, thanks to increasing demand. AboveNet recently announced the launch of network services in Amsterdam, Frankfurt, and Paris. It already garners 10% of revenues from The U.K., and its geographical footprint is fast spreading to highly lucrative Asian markets. Note that AboveNet has a long-term debt-to-total capital ratio of 9% (as of March 31, 2011), which is impressive for a company in a capital-intensive industry.

AboveNet’s fundamentals are sound and improving. It originally went public under the name Metromedia Fiber Networks in 1997. Since emerging from bankruptcy in 2003 under its new name, AboveNet’s top line has risen from $189 million in 2004 to an anticipated $470 million in 2011 (a 9.5% average annual rate of increase). It boasts more cash than debt, ($75 million versus $55 million, as of March 31, 2011), and it is turning a profit (unlike many of its competitors). Its metro fiber assets span over 1.9 million miles in 16 markets, and its long-hall network includes 11,000 route miles connected to over 400 data centers. Capital expenditures are expected to be around $145 million this year, and are in support of already announced expansion projects. Given the expected rise in traffic, we believe ABVT is the high bandwidth carrier of choice in metro markets for data center companies.

A Potential Takeover Target

Besides the fundamental reasons to own this stock, we believe AboveNet is a potential takeover target. The Internet infrastructure industry is consolidating. In May, Level 3 Communications (LVLT) bought Global Crossing Ltd (GLBC) for a 57% premium. To compete with Level 3, AT&T (T - Free AT&T Stock Report) or Verizon (VZ - Free Verizon Stock Report) may well be honing their sights on AboveNet. Level 3, is also a potential suitor. One thing is for sure, any company looking to acquire AboveNet would have to have deep pockets, given the likelihood of a bidding war. ABVT’s assets are invaluable, particularly since the need to increase bandwidth and provide faster connection speeds is vital, and ABVT has extensive fiber-optic networks at home and, increasingly, abroad. In addition, any acquirer wouldn’t be laden down with debt, a particularly alluring benefit in any takeover deal.

High Revenue Visibility

High revenue visibility is probably one of the most attractive aspects of an investment in, or the acquisition of, AboveNet. A dependable revenue stream stems from WAN, Metro, Foreign, and Fiber –infrastructure services. The latter stream is highly consistent and comprises the bulk of sales (40%). The former three revenue streams are faster growing and probe newer markets. Furthermore, much of ABVT’ s business comes from Type II circuits. These are circuits the company leases from other carriers if it needs to connect a customer to an area in which it doesn’t operate. Although lower margined, and relatively minor, this volume is stable and growing. The primary business of selling its own higher-margined fiber connections is in great demand. Lastly, contract termination revenue is a penalty payment to get out of a contract early that is pure profit. In the March quarter, it was the highest in two years ($2.1 million). Although not conducive to a long-term growth strategy, it is a pleasant short-term sweetener. Typically, by mid-summer, management has a good idea as to how sales will come in for the full year. We look for revenues to continue growing at a 9.5% average annual pace through 2014-2016.

Conclusion

This stock has stable and growing revenues, and services that are essential to the growth of corporations (public and private) and communications carriers. The company has strong finances (low debt and high levels of cash flow), and as the quarters progress, sales should increasingly outstrip expenses to generate higher earnings. Last, but by no means least, the company appears to be a strong takeover candidate.

 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.