Neutral Tandem (NASDAQ:TNDM): Stock oversold; Reit Outperform and $33 target - Oppenehimer

Oppenheimer is out with an interesting call on Neutral Tandem (NASDAQ:TNDM) calling the stock oversold and reiterating their Outperform rating and $33 target.

Firm believes the stock has been oversold and would take advantage of the attractive entry point (TNDM trades at a discount to historical multiples, the towers and data-focused interconnection models). Following channel checks, they believe that concerns regarding emerging competition are overblown and TNDM could pull a number of levers to defend its market share. The first catalyst for the stock will likely be the company's 3Q09 report and they also expect a court ruling on patent infringement in November. The key risk to the story is migration to IP (3-10 years out) and consolidation (limited due to regulatory oversight).

- TNDM's horizontal niche, carrier neutrality, stellar margins and low capital requirements have attracted competition. However, they believe the barriers to entry are high, competition is limited and recent selling pressures are overdone.

- Oppenheimer's recent channel checks indicate that Peerless Networks has launched limited service in at least six markets. The competitor has managed to take some traffic away from TNDM, mostly by offering substantially lower prices, but this is also helping to expand the overall interest in tandem services

- They believe TNDM could resort to selective price discounts to retain its market share. Other defensive initiatives include: 1) Bundling new services; 2) Lower prices for new services in new territories; 3) Long-term contract discounts; 4) Focus on nationwide availability; 5) Explore the potential for SIP.

- Expected solid 3Q09 results will likely serve as a catalyst for the stock. Oppenehimer thinks TNDM is currently priced for the worst at 13x EPS and 5.5x their 2010E EBITDA, well below the 13-14x of wireless towers and close to 10x for data-focused interconnection models. Firm expects strong revenue growth and free cash flow generation in the next 2-3 years. They have stress-tested our model and still believe the company can beat its 2009 guidance.

Oppenheimer notes short interest in Neutral Tandem has increased dramatically in the past two months (to 4.6 million shares on September 15 from 2.3 million on July 31).

Another potential catalyst for the stock is the impairment of competition in the next few months. Neutral Tandem has filed a patent lawsuit against Peerless Networks and an injunction could be ruled in the next 2-3 months.

Notablecalls: I must say I like this call.

- Tandem is an analyst darling. Opco defended the stock back on Aug 6 but the stock is down another 10 pts since then. The problem the stock got whacked was because of raising competition from other 3rd party competitors (namely Peerless) but one would think this has been discounted by now.

- Tandem helps Telcos save money they would otherwise have to pay to incumbent local exchange carriers (ILEC's) for traffic. The service is better & it costs less. So TNDM makes sense in current environment.

- Opco highlights two n-t catalysts. 1) Results - TNDM has a tendency to beat expectations. 2) Potential injunction against Peerless.

- Short interest has taken quite a leap higher over the past couple of months and stands at around 14%. This of course means anything positive will propel the shares higher from here.

With the market tone positive this morning, I suspect TNDM may have some legs. I see the stock trading towards $23 level in the n-t.