Wednesday, October 27, 2010

Equinix (NASDAQ:EQIX): Colour on quarter - Bounce?

Equinix (NASDAQ:EQIX), the latest nail on my coffin, is enjoying some hot analyst lovin' this morning after the co issued above consensus guidance for 2011.

- Cowen reits Outperform noting quarterly revenue and EBITDA results were slightly above reduced guidance Equinix issued on October 5, however they were more encouraged with initial 2011 revenue and EBITDA guidance of >$1.500B (Street: $1.491B) and >$675MM (Street: $660MM). The company also expects a meaningful reduction in capex next year suggesting it will be FCF positive an important milestone that investors have been looking for. While heightened churn in Europe negatively impacted results in that market the company showed solid results in both North America and Asia including better than expected cabinet adds and revenue per cabinet. Overall, results further confirm Cowen's view that its recent pre-announcement was not indicative of deteriorating fundaments and believe the recent sell-off provides a significant buying opportunity.

Fundamentals intact.
*Issues at Switch and Data already improving.
*Reduced capex means company will start generating FCF.
*Equinix will host its Analyst Day in New York on November 11.

Valuation. EQIX trades at 7.2x 2011E EBITDA versus the comp group at 10.6x. Cowen believes EQIX should trade at a premium based on its industry leading growth and margin and its ability to generate significant cash flow in outer years. Using a 9.0x exit multiple and a 10.9% WACC, firm's DCF valuation suggests EQIX can outperform the market by 30% over the next 12 months.

- Deutsche reits Buy and $100 target saying their overall takeaway from full 3Q results is that this should help investors begin to get more comfortable that the 3Q miss was company specific and fixable. The company did a good job on the call providing further clarity into the issues (churn, pricing) and provided 2011 guidance that was ahead of expectations. As a result, they are raising their forecasts and reiterate their Buy and $100 target. Firm likes the stock at current levels and thinks it slowly works its way higher as it rebuilds investor confidence.

At $80, the stock trades at 7.4x 2011 EV/EBITDA, near the bottom of its historical range of 7x – 17x. The analyst day on November 11th could prove a positive catalyst and they think the stock can work its way back over time to where it was pre-3Q miss.

- Morgan Stanley is a bit more cautious on the name saying that despite better than expected MRR / cabinet results, they see risks to 2011 EBITDA guidance on higher churn (set to average 2.7% in 2H) and expense pressures. While management’s plan to address SDXC was encouraging, they believe that efforts may be in their early stages, with a turnaround unlikely until mid-2011. Firm sees significant risks for higher capex in 2011 than in current guidance, although they now forecast FCF breakeven results. In their view, EQIX remains a show me story, despite the near historical trough valuation (ex the credit crisis) at 7.6x 2011E EBITDA.

- Piper reits OW & $110 target noting Equinix is beginning to make the transition from a high growth company to one focused on balanced growth and free cash flow generation. They believe management is now focused on free cash flow generation with growth layered on top. As the firm noted in their October 21 note ("What Is Equinix Worth?...), they estimate that valuing the free cash flow generation could yield to a 2012 valuation of $108. Piper realizes that the stock is not likely to recover to these levels until investors have confidence that supply/demand/pricing trends are positive; however, they think the current stock price represents a good buying opportunity for investors with a 12-month horizon.

Notablecalls: So there you have it, it looks like EQIX can indeed overcome the brief speed bump that caused its stock price to crash 35 pts on Oct 6.

Given my awful (just awful!) track with EQIX, I'm not going to make an outright call here. I think its going higher from the $80 today and in the n-t. But my guess is worth squat here.

Just don't chase it, let it come to you.

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