Atlantic Tele-Network: Hold the Call

Connecting to the telecommunications sector is a challenge for investors, who have been jammed by losses from phone stocks all year. Hang on a moment, though: Atlantic Tele-Network, Inc. (Nasdaq: ATNI) is trying to get through.

Hello, Guyana? For 17 years, Atlantic Tele-Network has owned 80% of the equity of Guyana Telephone and Telegraph Company (GT&T) — the national telephone service provider and largest wireless service provider in the Cooperative Republic of Guyana. As a telecom specialist in small regions, Atlantic owns all of Commnet Wireless, LLC, which offers roaming services for U.S. and international carriers in rural areas throughout the United States.

With corporate offices in Salem, Mass. and St. Thomas, United States Virgin Islands, Atlantic also owns SoVerNet, which operates in New England. Other services include Choice Communications, LLC, in the Virgin Islands; Atlantic also owns nearly half of Bermuda Digital Communications Ltd.

The company has skulked to a 10% year-to-date loss, compared with the 13% decline in the S&P Global Telecommunications Sector Index Fund. Atlantic has been dragged down by sector and overall market weakness, and good news through the third quarter ended September already has been factored into values. Calls for an earnings growth slowdown this year can’t be ignored.

In early November, Atlantic said its revenues were up 14% for the quarter to $47 million, compared with the same time the previous year. Net income increased by 15% to $0.61 per diluted share. The company's revenue was up 19% for the nine months through September, and net income on a per-share basis was up 32%. Fourth quarter results are expected Thursday.

That’s solid growth, and there will be more to come if the company pulls off plans for both its U.S. and Caribbean operations. In the United States, Commnet Wireless is key: Atlantic said in September that it would sell cell sites in two Midwest states to a carrier, and agreed — in exchange for a long-term roaming agreement — to build a network in rural areas in three states.

A payoff may come from the network build, but there is likely to be a temporary drag on cash flow as capital expenditures rise. Indeed, CEO Michael Prior said as third-quarter results were released that the new network build will likely slow Commnet’s growth in the near-term. The company also intends to continue to invest in Commnet, which was the primary driver of consolidated revenue and profit growth for the third quarter.

Despite the anticipated slowdown, Hamad Khorsand at BWS Financial, Inc., indicated in a January research note that the near-term impact of the network build would have only a minimal impact on Commnet’s revenues. Revenues from the new coverage areas are expected to be greater than those from the divested Midwest sites because of competition in the Midwest and the region’s limited growth potential.

“The first-quarter 2008 results could be the only quarter where there is some comparable measure for the change in coverage area,” Khorsand wrote, noting too that Commnet’s peak usage is in the second and third quarters, not the fourth.

Commnet aside, there are worries about the Guyana hookup. The country holds a 20% stake in GT&T, and its exclusivity amid increasing competition has been called to question. “While we believe in GT&T's legal right to operate exclusively, we expect that any type of increased wireline competition would adversely affect the company's business,” wrote Ric Prentiss, analyst at Raymond James, in December.

Prentiss said GT&T also is in a tax dispute with the country’s tax collection agency over about $23.5 million in income taxes the government wants — mostly related to management fees. “If GT&T is required to pay these additional taxes and/or reduce the management fee paid to Atlantic Tele-Network, this would adversely affect the company,” the analyst said.

Ouch. In addition to these concerns, GT&T faces competition, the party pooper of telecom. Competition will rise from VoIP technology and wireless substitution, and the government already has provided an additional wireless license to Digicel. Prentiss notes risk at Commnet if carriers overbuild the company's base station network.

Still, both Prentiss and Khorsand are optimistic about Atlantic’s prospects, with each carrying a $40 target. Shares of the company closed Tuesday at $30.42 within a 52-week range of $23.71 to $39.21. Atlantic has market capitalization of $463 million.

Atlantic has bucked the competition worries, which have been around for at least a year as the company continued to grow and shares rallied from the $25 level. Atlantic has shown resilience: its three-year sales growth rate is 22%, and net income has risen 23% in the same time. Atlantic has a dividend yield of 2.20%.

For 2007, the average earnings estimate of four analysts is $2.23 per share, rising to $2.27 in 2008 — a 2% gain that puts shares at a reasonable P/E ratio of 13. Revenue is seen at $198 million, up 17%.

Atlantic (ATNI), you’re fading in and out. Call back when there’s less static on the line, OK?