By Brett Messing
From TheStreet.com
09/16/2002

It's time to give some updated thoughts on stocks that I've written about over the past year. In the words of the Queen, this has been annus horribilis. There has been nowhere to run and nowhere to hide. While I am firmly entrenched in the buy-and-hold camp, this shouldn't be mistaken for ostrich-style investing. We must be vigilant in taking stock of our holdings. Here we go.

Liberty Media: I still like it. Liberty Media has gotten hammered in the media-stock carnage. It trades at 65% of its net asset value. The company is on track to generate 15% cash flow growth for 2002. There will be a series of asset sales and restructurings in the media industry, and CEO John Malone is going to be right in the middle of it. Among other things, Liberty is one of the largest shareholders of AOL Time Warner and Vivendi. Malone is no longer content to be a passive shareholder, and media investors should be better off because of it.

Raytheon: I like defense stocks, and I think Raytheon will be fine. But I'm disappointed by the continuing losses at its former engineering and construction unit (to which Raytheon is still exposed), and the company's corporate jet division is still struggling. After the recent pullback in defense stocks (although they've bounced nicely off their lows), Raytheon is not particularly cheap on a relative basis. In fact, General Dynamics trades at a lower earnings multiple. I want to own defense stocks, but Raytheon is not at the top of the list.

AutoNation: The stock has done a round trip over the past several months. It ran up to $18 after I wrote about it, but it has retraced the move. I still like it. Nothing has really changed since I wrote about it. The stock is very cheap at 11 times 2002 earnings and 10 times 2003 earnings. Auto sales continue to be remarkably and unwaveringly strong. The heavy promotion and attractive financing deals offered by the automakers are a boon to auto retailers like AutoNation. One slight negative is that the stock saw some insider selling in the $16 to $18 range in May and June. The sellers included ESL Partners, which sold 1.5 million shares but continues to own 75 million shares.

Allegiance Telecom: I agree with Cody Willard's recent insights and bullishness on the company. The company's operating performance has been very good. It is on track to grow revenue 50% in 2002 (unheard of for a telecom service provider), and it is projected to turn EBITDA-positive this month. Its stock and bonds have gotten hammered because of concerns about financing risk. The company's debt load is manageable at $1.1 billion, but the bank covenants (particularly, the ratio of EBITDA to senior secured debt) are somewhat challenging in 2003.

Allegiance is now engaged in negotiations with its bank syndicate to relax the covenants. The existing bank package is very company-friendly, so the company is in a good position to make a trade. As an example, the existing bank deal allows the company to repurchase bonds. The banks hate it when their money is used to retire junior securities. Additionally, it has been reported that a meaningful slug of the bank debt has been acquired by a new investor who is very supportive of the company. I expect that a new bank deal will get done, and the stock and bonds will rally. The market is pricing the company's securities for bankruptcy, but I think the market has got this one wrong. I like this situation, but it's only for the most speculative investors.

AT&T: It has performed well (certainly on a relative basis) since I wrote about it in early June. My enthusiasm for this position has waned somewhat because of the closing of the arbitrage spread, the cloud overhanging EBITDA-valuation stocks that developed after the disclosure of the WorldCom fraud and the massive forthcoming issuance of Comcast stock. Comcast will be issuing about 1.35 billion shares (which at $24 per share is $32.4 billion). As a point of reference, the present valuation of the entire cable industry (equity only) is approximately $45 billion. Moreover, upon examination, the stocks of companies involved in recent mergers have been slow to recover after the consummation of the transaction. There seems to be a natural turnover in the shareholder base that takes time. Longer term, I like Comcast and the remaining AT&T stub, but I'm not sure that it will continue to outperform the broader market.

IDT: This stock has been relatively flat since I wrote about it. In this stock market, a telecom stock that flatlines is a huge (yet Pyrrhic) victory. IDT has the very best balance sheet in the telecom industry. It is a $17 stock with about $13 per share of cash. So, in essence, investors are getting a billion-dollar telecom business that is projected to generate $100 million in EBITDA for $4 per share. Liberty Media (IDT's largest outside shareholder) recently purchased a 5% position in the company's telecom business at a price that values the business at $600 million. IDT is also a plaintiff in several lawsuits that have the potential to generate judgments (or settlements) of $100 million to $500 million. The company is very conservative in the management of its businesses and its balance sheet. I expect them to opportunistically acquire telecom and media assets. IDT is a keeper.

Brett Messing is a managing director at Neuberger Berman LLC. The views expressed are Messing's and do not represent the views of Neuberger Berman LLC, its portfolio managers, employees or affiliates. At time of publication, Neuberger Berman or its clients were long Liberty Media, Raytheon, AutoNation, Allegiance, AT&T and IDT, although positions may change at any time. This material is not intended to be a formal research report or recommendation and should not be construed as an offer to sell or the solicitation of an offer to buy any security. Before acting on any advice or recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Messing appreciates your feedback and invites you to send it along.