COMM - CommScope: Growth Ahead Should Be Moderate At Best

2023-03-15 06:37:57 ET

Summary

• It looks to be that 2023 is going to be a tough year for COMM.
• Macro-economic headwinds, stubborn inflation, higher costs of capital, and ongoing supply chain constraints will continue to weigh on the performance of the company.
• If the company manages to grow at all for the year, it's going to be at a very moderate rate in my opinion.

CommScope Holding Company, Inc. ( COMM ) offers infrastructure solutions for communication networks. The company offers a variety of products and services, including network connectivity, wireless solutions, broadband access, and data center solutions.

In its latest earnings report it had mixed results, with modest growth in revenue, a lot of long-term debt, and net leverage of 6.9x. It also had a goodwill impairment charge of $1.12 billion, resulting in a big net loss in the fourth quarter of 2022.

It continues to throw off decent cash flow and should generate decent adjusted EBITDA in 2023, but overall, taking into consideration ongoing supply constraints with some products and components, macro-economic headwinds, higher costs of capital, and stubborn inflation, the company has the type of headwinds that are probably going to result in disappointment for investors, as I believe things are going to get economically worse throughout 2023.In this article we'll look at some of its recent numbers, supply chain constraints, and why I believe the company is going to struggle over the next year.

Some of the numbers

Revenue in the fourth quarter of 2022 was $2.32 billion, up four percent year-over-year. Revenue for full year 2022 was $9.23 billion, compared to revenue of $8.59 billion for full year 2021.

Cash flow from operations in the fourth quarter of 2022 was $486.8 million. The company generated free cash flow of $364.00 million in the fourth quarter of 2022.

Net loss in the reporting period was -$(1.11) billion, or -$(5.39) per share, compared to a net loss of -$(87.1) million, or -$(0.50) per share in the fourth quarter of 2021. Net loss for full year 2022 was -$(1.29) billion, or -$(6.49) per share, compared to a net loss of -$($535) million, or -$(2.55) per share for full year 2021.

The net loss came from a goodwill impairment charge of $1.12 billion related to its ANS segment.

Cash and cash equivalents at the end of calendar 2022 was $398.1 million, compared to cash and cash equivalents of $360.3 million at the end of calendar 2021, with total liquidity of $1.31 billion.

The company had long-term debt of $9.47 billion at the end of 2022, compared to long-term debt of $9.48 billion at the end of 2021. While improved from the 7.8x net leverage at the end of the fourth quarter of 2021, at the end of 2022 COMM still had a hefty net leverage of 6.9x.

Management said that based upon communications with its customer base, it was optimistic on how the company will perform in the second half of 2023.

That said, the fourth quarter started to see a decline in orders, and I'm not convinced it'll meet 2023 expectations based upon the weakening global economy and associated challenges.

Supply chain constraints remain

CommScope faces a number of supply chain constraints that may continue to impact its performance. Management noted that the majority of the impact COVID-19 had on the company has shrunk, it resulted in other consequences, such as material shortages, inflation, and an increase in costs associated with logistics.

Supply chain issues, demand, and inventory build-up has resulted in market volatility in general, which as it relates to COMM, has brought about higher operational costs.

On the supply side, the three main products it's struggling to obtain are capacitors, memory devices, and silicon chips. Not only has that resulted in higher prices, but it also had an impact on timely product deliveries to its customers as lead times were extended.

Like a number of its peers and other companies, the company is partially mitigating the issue by raising prices on some of its products and services. It is also buying more materials and components in advance, building up its inventories in order to meet demand on a more consistent basis.

The company has also been recruiting other vendors for specific components, and even for some redesign of some products.

While the company expects supply chain constraints to ease in 2023, it still believes there will continue to be some shortages with some products and components over the next year or so.

Economic challenges

It is my increasing belief that the global economy is probably going to be worse in 2023 than has been thought since the Federal Reserve and other central banks launched their battle against inflation. Inflation has remained stubbornly high, and the Fed will continue to raise rates in the near term. That means higher cost of capital, energy costs, and increasing concern in the job market as a result of ongoing layoffs and downwardly revised projections of GDP growth in a number of major markets, such as China and the U.S.

With the prioritizing of spending at the individual and corporate level, that would have an impact on the performance of COMM if people and corporations start to reduce and put off spending until there is more clarity as to the length and depth of a recession, which I believe is already here.

While COMM could lose some business from those types of spending decisions, the most impact would most likely be from the timing of capital spending and how much will be spend over most of 2023.

In researching and writing about a lot of different companies, one theme I've read or listened to from management teams many times is they have been in talks with their customers, and feedback suggests there isn't going to be much of a slowdown in 2023.

The point isn't that there isn't plenty of demand out there, because there is. Rather, the point is not only being able to supply that demand, but also what effect the weakening global economy will have on company spending.

This is where I think many management teams are missing it and are going to be surprised at the impact the macro-economic conditions will have on their results, especially in the second half, which COMM is guiding for to improve. Not only do I not believe that, I think it's going to get worse in the second half of calendar 2023 if the global economy continues to get worse.

Conclusion

As mentioned in my opening remarks, the recent performance of COMM has been mixed, and while management believes, for the most part, the worst is over, my thesis is that it's not, and we will have to endure a tough 2023, and possibly early 2024, before an economic bottom is hit.

For that reason, I see growth, at best, being very moderate for COMM, and if the economic slowdown is combined with worst-than-expected supply chain issues, it could be a very disappointing year for the company.

On the other hand, COMM stock is trading approximately $1.00 above its 5-year low, and it's unlikely to drop below that low, suggesting it's closing in on a good entry point; although I would still consider dollar-cost averaging for those interested in the stock because of the uncertainty and lack of visibility concerning the economy going forward.

The main takeaway is expectations need to be moderated in light of not knowing how deep and long the economy is going to struggle, which will have an impact on spending from the customer-base COMM has.

I don't see 2023 being disastrous for COMM. I see it as being a year of treading water until the Federal Reserve and other central banks stop hiking interest rates, and how inflation responds to those decisions. Until we know that, it's going to be a toss of the dice with the growth trajectory of COMM in the near term.

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