Moffett Initiates Altice USA Coverage With ‘Neutral’ Rating
MoffettNathanson principal and senior analyst Craig Moffett initiated coverage of Altice USA with a “neutral” rating and a $28 per share price target on its stock, adding that despite its early success, the cable operator’s cost-cutting initiatives will get harder to achieve as time progresses.
Altice USA burst on the scene in 2015, first as a dark horse buyer for Time Warner Cable – it lost out to Charter Communications – and later as the purchaser of Suddenlink Communications and Cablevision Systems. Altice USA, led by European telecom guru and John Malone disciple Patrick Drahi, was going to bring European management techniques to the U.S. cable business, drastically cut costs and make the business more efficient. At the time of its Cablevision purchase – for a hefty $17.7 billion – Altice said it would cut $900 million in costs out of that New York area business, which raised eyebrows.
Since then Altice said it has come closer to that goal and embarked on an ambitious five-year fiber-to-the-home buildout that it claims will bring even more efficiencies to the network. In the second quarter, cash flow increased 22%, more than double its peers, largely resulting from those cost cutting and efficiency efforts.
In his note, Moffett said that so far Altice USA has reduced its non-programming operating expenses per subscriber by almost 20%.
“But getting the rest will be much harder,” Moffett wrote, adding that the combination of continued cord-cutting pressure and an aggressive $80 per month 1-Gigabit per second broadband offering from rival Verizon may be too tough for the company to overcome.
“Verizon’s broadband offering steals the thunder from what would otherwise be Altice’s pressure release valve,” Moffett wrote, adding that he believes Altice will be able to raise profit margins but only at the expense of growth.
“There is no free lunch,” he continued.
Altice USA went public in June at $30 each and the stock rose quickly, mainly on deal speculation. But as that chatter has waned, so have the shares. Altice USA was priced at $25.97 each, down 3% (78 cents) in early trading Oct. 11.
Moffett also was skeptical of the cost savings Altice could extract from it fully fibered network, and doubted that the operator would be able to significantly add to its scale via acquisition.
Altice USA was said to have been lining up bankers for a bid for Charter Communications earlier this year, although that speculation has died down considerably. Charter has made it clear it is not interested in a deal.
But Moffett thinks that Altice USA’s other perennial target – Cox Communications, which also has said repeatedly it is not for sale – isn’t any more feasible.
“There appears no realistic path by which Altice can achieve meaningful scale in the U.S.,” Moffett wrote. “A Charter acquisition is out of reach. Cox appears uninterested in selling especially to Altice. Comcast? Ha. That leaves only table scraps. Small acquisitions (of under 1 million subscribers each) are possible, but there aren’t many of those out there. Very small acquisitions (of under 200,000 subscribers) are plentiful, but too costly to integrate. The window on being big enough to ‘matter’ has already closed.”
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