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Inside Wall Street


Investment manager Joan Lappin scouts for value disparities in sectors that are heating up. She buys the undervalued and shorts the overvalued. With that strategy, she has achieved compounded yearly returns of more than 20% for 12 years. Lappin is high on IXC Communications (IIXC), a wholesaler of switched long-distance services for voice, video, and data. IXC, whose customers include AT&T, MCI, WorldCom, and Sprint, trades at 40 --or a market value of $1.5 billion.

That's cheap, compared with rival Qwest Communications International (QWST), says Lappin, president of Gramercy Capital Management, who notes that Qwest is only now beginning to provide telecom services. Qwest trades at 72 a share, with a market capitalization of $7.5 billion. She estimates it will post 1998 revenues of $350 million and a pretax loss of some $88 million in its telecom operations. She thinks Qwest is a terrific stock to sell short. In 1997, Qwest posted revenues of $696.7 million and earnings of $14.5 million, or 15 cents a share, vs. a $7 million loss in 1996. But Lappin notes that only 16.5% of its revenues come from the telecom business.

"Qwest has made the year look terrific by reporting 1997 earnings that have little to do with its telecom activities--which have been losing money," says Lappin. She notes Qwest is a construction-service company building a high-capacity fiber-optic network.

IXC, however, should post $600 million in 1998 revenues and $100 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) from telecom operations, says Lappin. And in 1999, she expects IXC operating earnings of more than $200 million from telecoms. She thinks Qwest will continue to trail IXC in 1999, with earnings of $100 million from telecoms.

Lappin says the valuation disparity is even more glaring because Qwest has 106 million shares outstanding, vs. IXC's 33 million. "Logic suggests that the same amount of EBITDA spread over 33 million shares is a whole lot better than spread over 106 million," she argues.

So what's the bottom line? Lappin thinks IXC is worth twice what it is currently selling for, while Qwest is worth only half its present price. In mid-February, she says, IXC is scheduled to report "good 1997 results."BY GENE G. MARCIAL

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