Street Fight: BWS says sell GTT as William Blair remains bullish

This morning, BWS Financial analyst Hamed Khorsand initiated coverage of GTT Communications (GTT) with a Sell rating, arguing that M&A has come at a cost the company can no longer afford. Meanwhile, his peer as William Blair remains bullish on the stock, saying he views Friday's pullback in the shares following quarterly results as a buying opportunity. RESULTS: On Friday, GTT Communications reported second quarter losses per share of ($2.83) and revenue of $326.8M, with consensus at (39c) and $290.04M, respectively. The company also said that net loss was $136.3M, compared to net income of $700,000 in Q2 2017 and net loss of $30.7M in Q1 of 2018. The net loss was primarily due to the result of several non-recurring costs related to the Interoute acquisition, including $13.7M in exit, transaction and integration costs, $13.8M loss on extinguishment of debt and $88.6M of expense related to a foreign currency hedge which was entered into at the time the Interoute acquisition was announced and subsequently settled at closing. SELLOFF A BUYING OPPORTUNITY: In a research note this morning, William Blair analyst Jim Breen told investors that he views the pullback in shares of GTT Communications on Friday after a less than clean quarter as a buying opportunity. The analyst acknowledged that he understands investors being cautious given the recently elevated debt levels to fund the Interoute acquisition, as well as margin weakness and a slight sequential revenue decline in the quarter. However, Breen highlighted that the majority of the reported revenue impact came from foreign exchange and the one-time churn of two customers, and he expects margin expansion over the next several quarters. The Interoute acquisition will nearly double the size of the total company, provide $100M in synergies, and further expand GTT's potential deal pipeline, he contended. Further, with expanding margins and low capital-expenditure requirements, the analyst estimates free cash flow will continue to increase. Breen reiterated an Outperform rating on the shares. BWS SAYS SELL GTT: Meanwhile, BWS Financial's Khorsand started coverage of GTT Communications with a Sell rating and $5 price target. The analyst noted that GTT has been rolling up Internet backbone companies in an effort to enhance its scale and presence in the industry, but it has come at a cost they can no longer afford. Over the span of eleven years GTT has completed over 30 acquisitions, but now has $3.2B in debt and has yet to report a quarter where cash flow from operations would be able to cover capex, interest expense, and enough to make a principal debt payment, he contended. Khorsand believes GTT could end up in a perpetual cycle of making larger deals to keep cash flowing through the balance sheet in an effort to extend out maturities. The debt balance could leave little value for the equity, he added. PRICE ACTION: In morning trading, shares of GTT have dropped almost 2% to $39.75.

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