Back from the Dead

09/09/2009 12:00 pm EST


George Putnam

Editor, The Turnaround Letter

George Putnam, editor of The Turnaround Letter, says one of the most notorious companies of the era is very quietly posting revenue and cash flow growth.

Global Crossing (Nasdaq: GLBC) was started in 1997 to build a worldwide fiber optic cable network. It raised billions of dollars of capital, mostly debt, and used the money to lay thousands of miles of fiber optic cable spanning the globe.

The initial strategy seems to have been “if you build it, they will come.” Global Crossing built the network, but as the telecom bubble burst around 2000, nobody came. Revenues grew very slowly, and the company was forced to file for Chapter 11 [protection] in January 2002.

Global Crossing emerged from Chapter 11 in December 2003. The new stock went as high as $36 shortly after it began trading. Unfortunately, Global Crossing’s results continued to lag expectations. The stock hit a low of $5 earlier this year before beginning to recover.

[But] the network is still built—it connects 690 cities in 60 countries around the world—and the revenues are finally beginning to come. Over the last three fiscal years, revenues grew from $1.87 billion in 2006 to $2.59 billion in 2008. Despite the downturn in the worldwide economy, revenues in the first half of 2009 are only down slightly from 2008.

The tremendous growth in data, voice, and video traffic is finally beginning to fill up some capacity in worldwide networks. The company has also developed a successful marketing strategy focusing on mid-sized to large companies with far-flung operations. Since much of the cost of the business is fixed (and incurred years ago when the cables were first laid), a large part of any increase in revenues will drop straight to the bottom line.

In addition, Global Crossing has been able to cut its overhead over the last few years, further increasing operating profits. Because the company is still depreciating many of its assets, it may continue to show net losses for a while. However, it is now generating free cash flow for the first time in its history.

Even though Global Crossing reduced its leverage significantly through the Chapter 11 filing, there is still a fair amount of debt on the balance sheet. But it has no significant debt maturities for several years, and if current trends continue, it should have no trouble refinancing that debt.

We’re not the only ones who are attracted to the value in Global Crossing’s network.

Singapore Technologies Telemedia, which has a reputation as a very well-run company, owns more than half of the Global Crossing stock. (Accounts managed by an affiliate of the publisher own Global Crossing stock.)

We think Global Crossing’s current stock price gives you the opportunity to buy into a very valuable communications network at a tiny fraction of its original cost and at a time when the potential of that network is finally beginning to be fulfilled. We recommend buying Global Crossing stock up to $17. (It closed below $12 Tuesday—Editor.)

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