Banc of America is positive on Leap Wireless (NASDAQ:LEAP) saying they do not believe that the churn spike in expansion markets at Leap, exaggerated by a rolling series of large market launches which suddenly stopped, gives evidence of larger 'sub-prime' market exposure. The key lesson learned on the heels of 2Q Leap results was that the continuous market launching in 2006 depressed regular reported churn data leaving 2006 a poor baseline for 2007 estimates.
They have updated their Leap model taking into consideration 2Q results, 3Q07 2007, and 2008 guidance provided by the company, and follow-up conversations with management. New 2007 EBITDA estimate is $413 million vs. previous $448 million. This represents 51% Y/Y '07 EBITDA growth. Firm anticipates 40% growth in 2008, including new, AWS market launch costs.
They believe Leap Wireless remains an attractive investment opportunity, more so following its sharp correction on the back of 2Q results. Leap is a solid and proven business model (~30% EBITDA margins, over 40% in core markets) expanding covered pops in 2008 by 45% where financial growth expectations (39% '07-'10 EBITDA CAGR, including $100 million of launch costs in 2008) justify a premium valuation, in firm's view, relative to national postpaid wireless carriers and the telecom sector generally.
Maintains Buy and $100 target.
Notablecalls: Expect this call to generate some interest in LEAP.