In a report that references ex-British Prime Minister Margaret Thatcher, Wahlman says the privatization of spectrum could make Germany the most-WiMaxed country in the world:
Germany is completing the auctioning of approximately four 3.5 GHz licenses at what appears to be extremely low prices. We believe this should cause a giant spending boom for WiMax in Germany starting some time in 2007. Of course, Alvarion will be one of the leading contenders for these four new accounts, with the usual list of competitive suspects, in our opinion.
Many years have passed since Margaret Thatcher and Ronald Reagan delivered excitement in terms of attempting to roll back the long claws of government ownership. Of course, the U.S. sold 1900 MHz spectrum in the mid-1990s and only a few months ago held some further auctions for 1700 and 2100 MHz. But, generally, these moments of privatization have been few and far between. At least outside of the former Eastern Bloc and South-East Asia, capitalism and private property have generally not been on the march for the last 15+ years.
So it is with great joy that we celebrate this year’s Christmas gift from Germany: Privatizing 3.5 GHz spectrum for WiMax. The new Merkel government is selling approximately four licenses for what appears to be no more than approximately 16m Euros per license. This price is a radical bargain compared to the prices paid in the U.S. or, for that matter, what has been paid for lower frequencies in Europe a few short years ago.
We believe this relatively bold move by the German government sets up that country to become the world’s most advanced WiMax nation in the 2007-08 time frame. The combination of approximately four WiMax competitors against one relatively highly-priced (as much as 50 Euros per month) DSL incumbent and very weak cable TV offerings, should cause WiMax to gain a higher market share in Germany than in any other broadband-developed country we know.
And Wahlman asks the pressing question of Alvarion and its peers, “Can four 3.5 GHz WiMax competitors survive longer term?”
We believe that all licensees will choose to wait for 802.16e for full deployment, and early versions of such equipment are available today with fully certified 802.16e available toward the latter stages of 2007. As such, we believe the bulk of the capital spending will start to kick in around the middle of 2007 at best. Competition for these contracts should be fierce.
At this point, we have no reliable view of how Alvarion’s 4Q is tracking. We maintain our 2006, 2007 and 2008 revenue estimates of $207m, $259m and $371m. For the same time periods, our untaxed EPS estimates remain ($0.01), $0.19 and $0.82. We maintain our 12-month price target of $10. This implies a target market cap of $630m, of which $109m is in cash. EV to estimated 2008 sales is, therefore, a ratio of 1.4. Cash per share is approximately 1.73. EV/share of approximately $8.73 is therefore an almost 11x multiple to our untaxed 2008 EPS estimate of $0.82, plus the cash.
Wahlman thinks the stock could rise to $10 over the next 12 months.
Alvarion has one of the lower valuations among wireless equipment vendors, according to estimates by CIBC-Oppenheimer’s Ittai Kidron, trading at 1.4x enterprise value-to-sales. Airspan (AIRN), its cousin in the WiMax equipment business, is cheaper still, its enterprise value trading below its projected sales this year and next.
Personally, I doubt whether a single country’s efforts will be enough to create a sizeable WiMax equipment market anytime soon, but we shall see.
Alvarion investors (and, perhaps, Helmut Kohl fans) are responding nicely to the positive outlook: ALVR shares are up 2.45% at $6.83. AIRN shares are up 3.39% at $3.66.