Ticker: <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FCLX)") else Response.Write("(Nasdaq: FCLX)") end if %>
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How Did it Double?
Shareholders who dialed into FirstCom and dialed up their brokers are sitting pretty here in late 1999. Simply said, the stock's ascension over the past 12 months has been nothing short of dramatic. When Santa was making his rounds last year, FirstCom was trading under $2. Pull up a current quote and it should be fairly obvious that the shares are trading for quite a bit more. While off its recent highs, the vast majority of investors who have bought FirstCom in the past year have seen the value of their shares at least double, and many are sitting on a 10-bagger.
Through the year, FirstCom has expanded the scope of its core Latin American communications businesses, including starting to offer long-distance telephone service in Peru. Revenue has been increasing through 1999 with sales in the first nine months of the year totaling $31.4 million versus $10.7 million in the same period of 1998. The absolute size of the company's losses has increased slightly in 1999, but the margins at the company have been generally looking healthier.
Beyond seeing the young FirstCom grow, there has really only been one salient news event in the past year for Wall Street to digest. On November 1 it was announced that AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> was forming a new Latin American unit and that FirstCom was going to be merged into this new venture. Between FirstCom's positioning as a first-mover in many Latin American markets and AT&T's reputation and mighty financial backing, Wall Street is quite excited about the new venture, having caused FirstCom's stock to more than triple in the weeks following the merger announcement.
Business Description
Formerly known as InterAmericas Communication, FirstCom operates as a competitive local exchange carrier (CLEC) in Latin America. Currently, the company offers its telephone and broadband Internet services to business customers in Chile, Peru, and Columbia. FirstCom's primary strategy is to take advantage of the communications deregulation happening in these and other emerging markets in South America.
FirstCom is in the process of being merged with a new entity created by AT&T to compete in the Latin American communications market. When the merger activity is completed, current FirstCom shareholders will own approximately 34% of the equity in the newly created company.
Financial Facts
Income Statement How Could You Have Found This Double?
One way to have perhaps found FirstCom was to look at the company's financial statements. Specifically, FirstCom's margins have been dramatically improving over time as the company starts to realize economies of scale thanks to its continued growth. In the third quarter of 1998, FirstCom had gross profits of $0.3 million, which translates to a gross margin of 7.9%. Fast forward to 1999's third quarter and the company had gross profits of $2.7 million, translating to a 26.0% gross margin. If the current margin trends remain steady, profitability is assuredly in the cards in the future. We can't say it enough. A company's intrinsic value is determined by future cash flows, not trailing profits or losses.
Though it is based in Florida, FirstCom may not have been entirely easy to find since the company's primary operations are outside the United States. FirstCom provides us with an example of how there are investment ideas out there for those willing to take the extra step and research international markets. After all, America isn't the only country that is seeing Internet usage skyrocket.
Most importantly, FirstCom represents a textbook example of how strategic positioning is more important than profits in the early portion of any given market's life cycle. Even though FirstCom has been without bottom-line earnings thus far, the company is now in the sweet spot in many of its markets and should be able to harvest profits down the road. The value of FirstCom's network infrastructure and its existing business relationships has been largely validated by the acquisition being made by AT&T.
Where to From Here?
If FirstCom were to go it alone in the coming years, the company would certainly be fighting an uphill battle. Though the total market size for telecommunications and Internet services is exploding down south, competition is also increasing. Plus, FirstCom does not exactly boast a powerful balance sheet since the company has a relatively scarce $27.5 million in cash and total liabilities of $161.4 million. Though being first to claim its operational real estate has given FirstCom an attractive market position, fending off competitors would have been no easy task with the cash ammunition running low.
Luckily, this point is largely moot with the AT&T merger agreement in place. One of the reasons the stock has done so well in recent weeks is because the newly formed AT&T Latin America will be a serious force to contend with. Combining FirstCom's local expertise and premier positioning with AT&T's experience and deep pockets will create a firm with as good a shot as any of revolutionizing the way people in Latin America communicate and do business. Those holding FirstCom have their fortunes tied to the success or failure of this newly formed company.
Of course, it's worth noting some of the risk factors today. There's always the chance that the AT&T deal will not be actually consummated, which would definitely take a chunk out of FirstCom's valuation in short order. Just because the companies are engaged and make a good couple doesn't mean the wedding will actually go through. Plus, investors in internationally based businesses need to be especially careful in their research since many risk factors are not plainly evident to outsiders. But for those interested in communications providers in emerging markets, FirstCom may just be worth looking into further.
Phone: 305-448-4422
Price (12/23/99): $38 1/4
12-month sales: $39.8 million
12-month income: ($32.5 million)
12-month EPS: N/A
Profit Margin: N/A
Market Cap: $932.4 million
Balance Sheet
Cash & Equivalents: $27.5 million
Current Assets: $37.3 million
Total Assets: $167.3 million
Current Liabilities: $23.7 million
Long-term Debt: $137.7 million
Total Liabilities: $161.4 million
Shareholders' Equity: $4.3 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 23.4