Altice USA stock was up as much as 4.7% in early trading Monday after Sanford Bernstein media analyst Peter Supino upgraded the stock to “outperform,” adding that the shares are woefully undervalued and pointing to potential catalysts in its mid-sized Suddenlink Communications markets.
Altice USA shares rose as high as $27.27 each, up $1.22 or 4.7%, in early morning trading. The stock was priced at $26.57 each (up 52 cents each or 2%) at 12:05 p.m. on Oct. 5.
Supino wrote that Altice USA has suffered from sluggish growth in the past, but he believes the underlying fundamentals bottomed out earlier this year. With capital spending associated with its fiber buildout expected to decline as the company nears completion, and the sale of 49% of its Lightpath commercial telecom subsidiary expected to inject about $1.1 billion in cash to the company in Q4, Altice USA will be able to invest more in the business.
Altice USA made an unsolicited offer to purchase Canadian telco Cogeco with Rogers Communications last month, a deal that was soundly rejected by the target’s ruling Audet family. Altice would have purchased Cogeco’s U.S. cable assets -- Atlantic Broadband -- for $3.6 billion while Rogers would acquire its Canadian assets for $4.2 billion. While some analysts had expected Altice and Rogers to increase their offer, so far, the deal appears dead in the water.
In the meantime, Supino believes that Altice USA should benefit from continuing to expand its homes passed, upgrading under-penetrated Suddenlink passings, modifying its MVNO agreement with T-Mobile and fiber upgrades to existing customers.
“Altice is a cheap stock of a solid business led by a highly incentivized management team,” Supino wrote. He pointed to the stock's low trading multiple (8.4 times cash flow) compared to peers like Charter Communications (11.6 times) Comcast (9.1 times) and Cable One (16.8 times).
While most investors focus on Altice USA’s New York area markets (sold under the Optimum brand), Supino said its Suddenlink markets could be the “sneaky secular growth driver” for the company.
“Amidst steadily rising demand for bandwidth – a powerful trend long before COVID19 – and with relentless cable upgrades overwhelming DSL competition, small town cable has become a quasi-monopoly on Internet service,” Supino wrote. He added that despite lower purchasing power and dispersed service territories, the rising demand for broadband in rural markets and Suddenlink’s low service penetration rates creates a long-term growth opportunity.
Supino said another opportunity lies in the completion of its fiber buildout, which is expected by the end of 2023.
“Assuming the project will be completed by year end 2023, 2024 capex should decline by over $300 million year-over-year to our $1 billion forecast, or 9% of revenue,” Supino wrote. “While this percentage may seem hopeful to experienced cable analysts, we point out that Altice's capex minus fiber investment benefits from best-in-class population density and penetration levels. ”
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