Neil Martin, analyst/reporter at Barron’s recommended RCN (RCNI) in this week’s Barron’s:

a. Annual sales of $636 million, RCN is tiny compared with Comcast, which has 24.7 million subscribers and annual sales of $30.9 billion, or Time Warner, with 14.7 million customers and $16.0 billion in yearly sales.

b. But, established a profitable niche by offering more appealing packages and pricing, providing better service and standing as an alternative for customers who don’t like dealing with the big guys like Comcast or Time Warner.

c.RCN network essentially is the same type of fiberoptic system that Verizon is building nationwide under the FiOS brand name. Such networks are faster, more reliable, easier to maintain and more efficient than the standard partial copper-wire or DSL systems that many telcos provide.

d. Like many telecoms during and after the telecom bubble, RCN struggled under a heavy debt load — so heavy that it was forced to file for bankruptcy protection for seven months in 2004. RCN emerged from bankruptcy with its network essentially intact, new management, about 64% less debt, a leaner workforce and renewed confidence that it could take on its big rivals. In March 2005, its stock was relisted on Nasdaq.

e. Yet, typical of telecom and cable operators who in their early years borrow and spend hundreds of millions of dollars to establish their systems, RCN has yet to post net income since emerging from bankruptcy.  BUT, revenue is rising: It jumped 9%, to $636 million, in 2007 and, management says, could hit $740 million this year. The company’s Ebitda — earn-ings before interest, taxes, depreciation and amortization, a cash-flow measure that analysts use to gauge cable companies — rose 24% last year, to $156 million, and is likely to be as much as $200 million in 2008.

f. At a recent price of 11.21, RCN’s common was 60% below its May 2007 high of 29. One factor in the decline has been hedge funds exiting the stock due to the subprime mess, which creates an opportunity.

g. Most analysts and money managers who’ve attempted a sum-of-the-parts valuation believe the stock is worth “north of 20.”

h. RCN looks like an attractive takeover target for a big rival like Verizon or Time Warner.

Conclusion:

RCN’s stock, which is now trading at less than half its May 2007 high, could rise more than 50% over the next year, and perhaps double in a takeover scenerio.

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