Morningstar | Skepticism About GTT's Organic Growth Potential Leads Us to Initiate Coverage With a $31 FVE
We are initiating coverage on GTT with a $31 fair value estimate, no-moat rating, and stable trend. Our valuation implies an enterprise value/adjusted EBITDA multiple of 11, slightly below the low- to midteens range of recent years, and makes the stock currently appear overvalued.GTT operates a global communications network, which it has built through a series of leases, and it has no metro footprint, instead partnering with local carriers for last-mile connections. GTT further distinguishes itself from its bigger competitors by serving exclusively large entities with global interconnection needs that a single carrier's network is unlikely to meet. This strategy, which mirrors that of the past era's long-distance carriers, eliminates ulterior motives to gravitate toward "on-net" connections, instead freeing GTT to select the best connectivity options. Also, with no on-net footprint, GTT gives its full attention to off-net customers, which can translate to better customer service.
Despite GTT's positioning, we question its potential for long-term success. We suspect other firms don't focus on large multinationals because that generally doesn't make for an attractive business. Multinationals typically have substantial bargaining power—especially with numerous global network alternatives—and resources to employ sophisticated personnel, allowing them to play a part in managing their own networks and leading to lower-margin revenue. Perhaps due to the difficulty we see in achieving large-scale organic growth, GTT has relied on acquisitions to expand, historically acquiring multiple companies each year. While we believe GTT realizes synergies as it brings smaller networks into a global one, we don't think it makes up for only modest industry growth and lack of sustainable competitive advantages. If GTT proved this is organically a lucrative business, we don't see why legacy providers, with their robust networks, couldn’t provide a similar customer experience.
GTT Communications provides cloud networking services including: wide area networking, which provides a variety of wide area networking solutions, including software-defined wide area networking, multiprotocol label switching, virtual private LAN service, and Ethernet; transport and infrastructure services, which provides a suite of transport and infrastructure services over its global network; internet, which provides clients internet connectivity and IP transit with availability and packet delivery; managed services, which provides managed network services, including managed equipment, security, managed hosting; and voice, which provides local voice service in various countries.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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