Stocks Fools Love

By Bill Mann (TMF Otter)
February 8, 2000

Trading at $38 1/2 as of February 7, 2000

The title of our Valentine's Day collection reminds me of a great line from an altogether forgettable movie. It comes from The Truth About Cats and Dogs:

"You can love your pets. Just don't LOVE your pets."

Almost worth the price of admission. Almost.

We're not supposed to grow infatuated with the companies we hold. It's natural law -- emotions cloud decisions. Still, when you've got a company in your portfolio that provides both stellar past performance and a dynamite potential for future growth, it's easy to get a little weak-kneed, isn't it?

I've got just such a company in my stable. It's a local company (McLean, VA) done good. In fact, last week Governor Gilmore of Virginia trumped me by recognizing Primus Telecommunications (Nasdaq: PRTL) as a bellwether asset for the state's high-technology industry, this coming on the heels of Primus being named the fastest growing high-technology company in the Washington, DC area.

With these big-time plaudits coming Primus' way, I wonder if I'll even be noticed, standing in the doorway, bouquet of daisies in hand. I like the company, I like what they do, I like how they've done it, and I like where they're going. But nobody calls me "Governor." Ah, unrequited love.

So I'll just admire from afar. Primus was founded in the early 1990s by a group of ex-MCI executives led by CEO Paul Singh to focus upon the burgeoning international voice telecommunications market, a segment that has enjoyed 25% growth per annum over the last decade. Singh and company were as prescient as they were fortunate, as the telecommunications markets in the U.S. and elsewhere were in rapid transformation from expensive service provided by stodgy old companies to responsive, cheaper services provided by, well, by whoever.

Primus, as it turns out, was in the vanguard of a whole new group of communications companies, the resellers. These companies (several of which are publicly traded) purchased bulk telecommunications capacity from the big facility-based carriers and resold it at a discount to individual customers whose usage patterns would not give them access to lower rates. This aftermarket for communications capacity quickly transformed itself into a viable industry with billions of dollars of annual sales in the U.S.

The price for calling many of the destinations around the world has dropped dramatically, in some cases by more than 80%. It is now cheaper for me to call London, England than it is to call Fredericksburg, Virginia. This is the nature of international voice telecommunications, a formerly closed environment, that has been blasted wide open by the callback companies, by deregulation, and by the hungry competitive providers like Primus. But like I said, there was some luck involved. The founders of this company had impeccable timing in terms of their attempt to fill a need in international voice communications in the United States. Ah, but 90% of luck really is skill, isn't it. To succeed one must be both fortunate and able.

And this is what makes me believe that Primus was not a one-hit wonder, a company that found a niche, filled it, and then held on to it for dear life. If they had, at this point they may not be so different than hundreds of other resale companies operating in the U.S., subsisting on margins that get thinner as the bandwidth to many highly trafficked destinations grows. Rather, Primus moved into a facility acquisition stage, choosing to purchase and build out its own network, and to compete in any market in which it was allowed to do so.

So now Primus may only be a name mostly familiar to many of the ethnic communities in the United States with strong contacts in their home countries. But Primus is one of the largest telecommunications, Internet, and data carriers in Australia, with large operations in Canada, Japan, Germany, France, Mexico, and the U.K. Primus purchased the largest independent Internet Service Provider in Brazil, and is the first company to offer DSL high-speed Internet service in that country.

Best of all, to my mind, is that Primus has taken on a massive capital spending program to build its global presence and has at the same time watched its money very closely. The company has increased its gross margins from operations annually, on annual growth in sales that has exceeded 60% for each of the last five years. So while the company has yet to make an operating profit due to aggressive marketing costs and the capital intensive nature of building out one's high-speed network, it has significant precedence as a company that watches the bottom line in operations.

Primus has just crossed the 12-month run rate of $1 billion in annual sales, and yet the company is valued at only 1.2X sales, with a market capitalization of some $1.3 billion dollars. I expect that the company's cash investment in building its trademark value will reap long-term benefits, not only in the ethnic communities the company originally represented, but on the global high-speed market today. In the last three weeks Primus has signed a large distribution agreement with Akamai (Nasdaq: AKAM), and a large bandwidth purchase agreement from Qwest (NYSE: Q) to improve the quality, speed, and redundancy of its international networks. This is a company that bears watching.

Even if it chooses to dance with the governor instead of me.


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Primus Company Information:
Trades on the Nasdaq under symbol PRTL

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