Wednesday, May 13, 2009

TW Telecom (NASDAQ:TWTC): Downgraded at Merrill and FBR

TW Telecom (NASDAQ:TWTC) gets two downgrades this morning:

- Merrill Lynch/BAM downgrades TWTC to Underperform from Buy with a $10 tgt on the realization of their thesis, strong stock performance and valuation. TW Telecom shares are discounting a view that the company can maintain its current revenue trajectory and margin profile throughout the economic downturn. Firm's projections are more cautious, as they believe TW Telecom’s contractual business model creates a lagged effect regarding changes in economic activity. TW Telecom faces regional economic pressure.

- FBR Capital notes TWTC reported better-than-expected 1Q09 results but provided a cautious outlook for 2009, reflecting macro trends, weak enterprise demand, product substitution, and pricing pressure. Results for 1Q09 were largely ahead of consensus and FBR expectations, driven by solid execution amid a difficult environment and reflecting the relative resiliency of the telecom services subscription-based business model. The $10M acquisition of a metro fiber asset (plus ancillary assets) in early 1Q09 is augmenting customer growth. Adjusted EBITDA exceeded expectations due to the combination of higher revenue and higher gross margin but was partially driven by a $2M deferral in merit pay increases to 2Q09. Enterprise revenue momentum in 2Q09 is a key focus, and management conveyed a cautious tone, consistent with FBR's meeting on March 12. Although 1Q09 is typically a seasonally weak quarter, they have not extrapolated the revenue growth rate, as they do not believe there has been a pickup in business demand at this juncture. The company typically sees revenues from new contract signings after a 60-day to six-month buildout following a new contract, suggesting lower 1Q09 signings will be evidenced in 2Q09 and 3Q09. FBR believes shares are fairly valued in the $12 range, and moderating revenue trends may limit near-term upside potential. They are lowering their rating from Outperform to Market Perform but would expect the shares to respond positively to any evidence of revenue momentum as part of a recovery scenario, which they believe it is too early to call.

Notablecalls: Two downgrades, with one coming from a tier-1 firm with a large client base will likely hit the stock. I would not be surprised to see sub-$11 levels today.

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