Earthlink, Inc.

Earthlink, Inc. (ELNK - Snapshot Report) continues to thrive on the basic building block of providing Internet service. It has surprised on estimates 3 out of the last 4 quarters by an average of 19.82%. The company is cheap. It's trading at only 5.2x forward earnings.

Company Description

Earthlink provides Internet services nationwide. The company was founded in 1994 in the infancy of the dot-com boom. It was among the first internet providers, in the mid-1990s, to offer flat-rate unlimited Internet service for only $19.95.

The company, a Zacks #1 Rank (Strong Buy), now provides dial-up, high-speed, voice, web hosting, wireless or "EarthLink Extras" like home networking or security across the country.

Earthlink Beat Wall Street Estimates by 45.71%

On July 29, Earthlink announced second quarter results that easily surprised by 16 cents a share. Income from continuing operations was $57.7 million, or 51 cents, compared to a loss of $(7.0) million, or a loss of 6 cents, in the second quarter of 2007. The year ago loss was due to $40.1 million in equity losses related to Helio.

The company's second quarter 2008 results included a loss of $4.4 million from discontinued operations for the municipal Wi-Fi assets compared to a loss of $9.3 million for the same segment in 2007.

Revenues fell 21.2% to $245.6 million from the same period a year ago. The company has been instituting a strategy of retaining tenured Internet access subscribers rather than simply growing the subscriber base. The tenured users have significantly lower support cost profiles compared to newer subscribers which should benefit the company over the long-term.

Full Year Guidance Raised

Due to an improved cost structure and better than expected improvements in average monthly customer churn, Earthlink raised its full year guidance to free cash flow of $250 million to $270 million.

The company sees favorable trends in many areas of the business through the remainder of the year but doesn't expect the same strong growth as it recently experienced.

Third Quarter and Full Year Estimates Rise

Covering analysts responded to the bullish full year guidance by raising estimates for the third quarter and the full year. Third-quarter estimates rose 5 cents to 40 cents a share in the last 90 days. For the full year, estimates are up 16.4% to $1.77 in the same period.

Earthlink reports third-quarter earnings on Oct 28.

Value Fundamentals

Earthlink is trading at only 5.2x forward earnings. Its price-to-book is 2.06. The company has a 5-year average return on equity (ROE) of 10.21%.