GLW - Clearfield: Well-Positioned Amidst Structural Growth Setup

2023-03-14 13:14:23 ET

Summary

• CLFD's core business is FTTH deployments in the community broadband market, which spans Tier 2 and 3, utilities, municipalities, and alternative carriers.
• With ~$100 billion of funding recently passed in the Bipartisan Infrastructure Bill, CLFD is well-positioned to benefit from the US government’s commitment to the proliferation of affordable high-speed broadband.
• With ~200,000 existing macro sites in the US, the addition of new small cell sites could prove a promising new opportunity for CLFD's fiber management products.
• I assign a Buy rating on the stock with a September 2023 price target of $70 based on an EV/Sales multiple of 2x.

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Thesis

Clearfield, Inc. ( CLFD ) is a leading provider of fiber optic solutions, and delivery products for communications networks, offering unique and differentiated solutions that overcome labor market challenges and accelerate revenue growth. With a dominant share in the Tier 2 and 3 markets and minimal competition, the company is well-positioned to benefit from the massive wave of broadband stimulus and infrastructure investment, particularly in the community broadband market. In addition, the nascent 5G market represents an attractive opportunity for CLFD's fiber management products. The company is expected to see significant revenue growth in the near-term, driven by the aforementioned factors. I assign a Buy rating to the stock with a September 2023 price target of $70 based on an EV/Sales multiple of 2x.

Unique and differentiated product portfolio

CLFD's core business is FTTH deployments in the community broadband market, which spans Tier 2 and 3, utilities, alternative carriers, and municipalities. At the center of Clearfield's product portfolio is the Clearview Cassette, a 12-port building block based on a modular architecture, which is deployed in both passive and active architectures as well as inside and outside the plant, whereas its competitors maintain different architectures for each part of their platform. This uniform, scalable approach reduces the required labor time and skill required for deployment and enables the delivery of a success-based model. CLFD's customers can align capital expenditures with subscriber take rates, driving critical savings for Tier 2 and Tier 3 customers. These factors have fueled the company's dominant share in the community broadband market and cultivated deep relationships with its customers.

Particularly well-positioned to benefit from the massive wave of broadband stimulus

As optical fiber is deployed further from the central office into the "outside plant" network to reach home or business, it needs to be protected and managed every step of the way. With ~$100 billion of funding recently passed in the Bipartisan Infrastructure Bill, Rural Digital Opportunity Fund (RDOF) and the Capital Projects Fund under the American Rescue Plan Act of 2021 (ARPA), the US is committed to offering all Americans access to affordable high-speed broadband, and in many cases have targeted 'future-proofing' these networks with fiber. Further, many of these programs are prioritizing distribution of funds to smaller, more localized service providers. RDOF, for example, utilized a reverse auction format in Phase I of the program focused on providing support on a more localized basis rather than giving incumbents a first right of refusal at the state level like previous programs. As such, I believe Clearfield is well-positioned among its broadband provider customers, particularly in its core community broadband market, to benefit from the massive investment cycle in broadband infrastructure. Deep customer relationships, a differentiated product suite designed for smaller service providers, and minimal competition are likely to drive continued market share gains in community broadband, while I see increasing Tier 1 share coming up for grabs as CommScope ( COMM ) has struggled from an operational and supply chain perspective and is loaded with debt .

5G Market Opportunity

While a nascent market, 5G represents an additional attractive market for CLFD in the future. Today's 5G radio access network (RAN) builds are primarily focused on upgrading existing 4G sites, where fiber typically already exists, to 5G and access to new spectrum/capacity. Within the next 3 years, however, I expect a meaningful shift in wireless operator capex from existing macro site upgrades to building new small cell radio sites. It has been estimated by industry experts that new small cells could outnumber existing macro sites over the next decade. With ~200k existing macro sites in the US, the addition of new small cell sites could prove a promising new opportunity for CLFD's fiber management products.

Revenue Breakdown

CLFD's revenue by market segment breakdown for FY2022 is shown in the exhibit below, where the majority of their revenue comes from Community Broadband, which includes Tier 2 & 3, utilities, municipalities, and alt carriers. This segment grew 84% YoY in FY22, and supports my view that CLFD is the dominant player in the low-to-mid market, while its two primary competitors in Corning ( GLW ) and CommScope are primarily focused on direct sales to global Tier 1 operators. Other notable drivers of growth include International, which grew 62% YoY in FY22 and accounted for 6% of revenue, and MSO, which grew 164% and accounted for 11% of revenue.

Competitive Landscape

CLFD faces a relatively small number of competitors for its fiber management and fiber delivery solutions, and the two main competitors, CommScope and Corning, primarily target sales to global Tier 1 operators, where CLFD's strength is with Tier 2 and Tier 3 community broadband service providers. I believe CLFD differentiates itself, particularly in the Tier 2/3 market, through its ability to deliver cost savings, simplify deployment in a labor-constrained market and accelerate time to revenue.

CommScope: COMM offers infrastructure solutions for communications networks and operates under 4 segments: Outdoor Wireless Networks, Venue and Campus networks, Broadband, and Home. COMM and CLFD are rivals in the fiber management market. CLFD's product line called FieldSmart includes cabinets, panels, wall boxes, and other enclosures that contain Clearview components. This provides a uniform design throughout the central office, outside plant, access network, and inside the home. Similarly, COMM also offers fiber management solutions that compete with CLFD's FieldSmart product line.

COMM is a key competitor in core accounts, primarily focused on direct sales to global Tier 1 operators. COMM has been loaded with debt since its 2019 acquisition of Arris and has faced serious liquidity concerns.

PPC Broadband : It is the wholly owned subsidiary of Belden and provides connectivity technology for telecom and broadcast industries, delivering both fiber and coax solutions to customers worldwide.

Corning Cabling Systems: GLW is a multi-national technology company specializing in ceramics and glass. GLW, like COMM, competes with CLFD's FieldSmart product line, and primarily sells to global Tier 1 operators.

Valuation

I value CLFD by looking at multiples of comparable communication infrastructure companies, which I use to derive my September’23 price target of $70. In my comparable analysis for CLFD, I look at communications infrastructure and broadband access companies to derive my price target. The companies I have used in my comparable analysis include ADTRAN Holdings, Inc. ( ADTN ), Calix, Inc. ( CALX ), CommScope Holding Company, Inc., and Harmonic Inc. ( HLIT ).

It is worth noting that CLFD is growing at a higher rate than of the comparable set with elevated operating margins. I have used EV/sales as my preferred valuation metric due to the limited profitability of companies operating in the sector. My end of fiscal year 2023 price target of $70 assumes CLFD shares will trade at a forward EV/Sales multiple of 2x in the near term (still at a discount to sector median ).

Risks

Historically, broadband subsidy programs in the US have experienced delays in their deployment. The Bipartisan infrastructure bill is expected to have an impact in the 2023/2024 period, if there are delays in the rollout, there could be a potential risk to the company’s FY23 revenue forecast and price target. Moreover, CLFD is facing difficulties with its global supply chain , which are affecting its ability to ship products and slowing down the rollout of US broadband investment. CLFD is also indirectly impacted by the global semiconductor shortage, and if there is a slowdown in investment in broadband infrastructure, it would negatively affect the company.

Final Thoughts

Clearfield, Inc. offers fiber management and delivery solutions to various communication service providers. With the majority of broadband investment yet to be deployed, CLFD's clear leadership in Tier 2 and 3 markets with minimal competition positions them well to benefit from the massive wave of broadband stimulus. I assign a Buy rating to the company’s stock with a September 2023 price target of $70 based on an assumed EV/Sales multiple of 2x.

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