McLeod USA expects strong second half

CLEC McLeod USA saw its stock jump almost 20% on positive analyst comments following a conference call on the carrier’s financial guidance for 2001. McLeod reiterated previous guidance for 2001, projecting $2.1 billion in revenue and earnings before interest, taxes, depreciation and amortization of $225 million.

On a conference call with analysts, McLeod said that sequential revenue growth in the first quarter would be down but that the carrier planned to increase its salesforce 60% by hiring an additional 350 salespeople in the first half of 2001. The carrier also plans to expand its network and possibly sell some non-core assets. Those assets include international operations acquired from CapRock Communications as well as 6.5 million rural wireless POPs. Mark Kastan, analyst at Credit Suisse First Boston, said the assets were worth between $100 million and $125 million.

The expected sequential decline in first quarter revenue was partially attributed to the company’s inability to collect on $14 million in “dubious” revenues. The revenue streams include wholesale dial-up ISP services and low-margin wholesale long distance services to Mexico.

“While we estimate a sequential decline in [first quarter] EBITDA, reflecting an increase in sales headcount and seasonality in the directory business, we are not overly concerned as this should be made up in [the second half],” said a report by Kastan, who has a “strong buy” rating on McLeod shares.

Given McLeod’s people and network investments in the first half, analyst Frank Governali at Goldman Sachs said as much 76% of McLeod’s cashflow earnings would be realized in the second half of the year. Governali remains bullish on the stock, citing the carrier’s total liquidity of $1.5 billion.

Other analysts are less certain that McLeod can ramp sales in the second half of the year. Daniel Zito, analyst at Lehman Brothers, cut his price target on McLeod shares to $17 from $22 a share. Zito said the carrier’s revenue guidance implies a “greater wholesale mix, more directory services revenue, and potentially a greater percentage of off-net lines, raising concerns about the company’s ability to deliver margin expansion long term.”

Zito, who has a “strong buy” rating on McLeod, lowered his 2001 revenue estimate to $2 billion and his EBITDA estimate to $186 million, below company projections.