Analysts at Macquarie initiated coverage of Altice USA with an “outperform” rating, showering praise on the cabler’s potential to expand margins, reduce churn and grow subscribers. Anticipated free cash flow growth, the firm said, could result in stock buybacks and additional M&A.
In a comprehensive overview of one of the largest operators in the country—with 8.6 million homes passed and 4.5 million residential customers at the end of 2017—the firm set a 12-month price target of $23.50 and anticipated steady growth in revenue from $9.3 billion in 2017 to an estimated $9.6 billion, $9.8 billion and $10.1 billion for 2018, 2019 and 2020, respectively.
An estimated $220 million reported loss this year would decline to $60 million in 2019 and swing to an $81 million profit in 2020, it said.
“Though a newcomer in the U.S. market, Altice has grand visions to transform the cable industry under US Chairman [Patrick] Drahi’s long-term vision to build a fixed, mobile, and content presence in the U.S. Execution has been solid thus far, and we are confident in the company’s long-term strategy,” the firm said—although it acknowledged investor skittishness with the cable sector overall due to cord cutting and rising programming costs.
Macquarie likes Altice USA’s upscale demographics in parts of New York and Texas, which give it a boost during a seasonally weak third quarter due to its exposure to summer rentals. It noted hefty investment in increasing broadband speeds that's helped up-sell customers. And it called the next-generation Altice One box, which launched late last year, “a significant improvement” in the company’s video product. The box offers enhanced video and connectivity, combining the capabilities of a set-top, modem, router and streaming device.
Analysts also cited a five-year fiber rollout covering the Optimum and part of the Suddenlink footprint; a strategic alliance with Sprint; a “small but powerful” B2B business; a focus on customer service; and management confidence that savings on nonprogramming spending categories would offset growth in programming costs.
Altice USA is currently a subsidiary of Netherlands-based Altice NV, but a planned spinoff of the U.S. business, announced in January, should be completed sometime in the current second quarter.