Its preferred treatment could bash telco's cash.

• Author: Speizer, Irwin
• Position: Money Matters

Even its detractors don't deny Charlotte-based US LEC Corp.'s ability to woo customers from competitors such as Atlanta-based telecommunications giant BellSouth. Revenue increased 24% to $311 million in 2003--after it increased 40% in 2002. "Quite frankly, they are kicking butt," says analyst Vik Grover of New York-based Needham & Co.

Because of that, he'd be willing to pay, oh, maybe a dollar per share for US LEC stock (Nasdaq: CLEC). That's right: a buck for butt-kicking performance. So how come investors were paying more than $4 in late August? "It's odd for him to tell the market we are worth $1 when the market has been telling us we are worth $4," says Mike Robinson, the company's chief financial officer.

Indeed, some of Grover's peers disagree with him. Frank Louthan, an analyst with St. Petersburg, Fla.-based Raymond James & Associates, issued a report July 30 touting the stock as a strong buy at $4 a share, with a 12-month target price of $10.

What investors and other analysts don't worry enough about, Grover says, are preferred-stock obligations and debt payments that could suck cash flow dry within a few years. US LEC ended June with $42.1 million in cash, up 14.6% from a year earlier. Two Boston-based investors, Bain Capital and Thomas H. Lee Partners, own the only preferred stock issued by the company--$249 million worth. Those shares pay 6% dividends, about $15 million a year. US LEC is paying the dividends in more shares instead of cash. But it eventually has to come up with cash because it is obligated to buy back preferred shares by 2010.

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Grover says it's unclear how the company could do that, and the looming cash crunch should worry common-stock...