2023-03-18 01:42:26 ET
Summary
- CABO recently posted disappointing quarterly and annual results.
- The stock looks overvalued compared to industry standards.
- The management has provided negative revenue guidance for FY23.
- I assign a hold rating on CABO.
Cable One ( CABO ) offers video, voice, and data services. They offer domestic data services, which improve Wi-Fi signal in the entire house; varied home video services, including fundamental video services and digital services with access to numerous networks; additionally offer a cloud-based DVR function that eliminates the need for set-top boxes. They also provide Sparklight TV, an IPTV service that lets users watch video channels from the cloud using compatible devices like the Apple TV, Amazon Firestick, and Android-based smart TVs. They recently announced their FY22 and Q4 FY22 results. In this report, I will analyze its financial performance and give my views on its future growth potential. I believe they are overvalued, and their fundamentals look weak. So I give a hold rating on CABO stock.
Financial Analysis
CABO recently announced its FY22 and Q4 FY22 results . The revenue for FY22 was $1.7 billion, a rise of 6.2% compared to FY21. The primary cause of the increase, in my opinion, was an increase in revenue from residential data services and acquired operations. When compared to FY21, revenue from residential data services increased by 11.8% in FY22. The net income for FY22 was $234.1 million, a decline of 19.7% compared to FY21. I believe the main reason behind the decline was the increase in operating costs and interest expenses. I believe the main cause of the increase in operating expenses was an extra $28 million in costs linked to acquired operations.
Seeking Alpha
The revenue for Q4 FY22 was $425.5 million, a decline of 1.6% compared to Q4 FY21. I think the decline was primarily caused by poor performance in the residential video, residential voice, and business services. Residential video, residential voice, and business service revenues fell by 13.4%, 18.7%, and 11.4% in Q4 FY22 compared to Q4 FY21, respectively. The net loss for Q4 FY22 was $77.2 million compared to the net income of $64.8 million in Q4 FY21. The call-and-put options to purchase the residual equity interests in Mega Broadband Investments Holdings resulted in a non-cash loss of $128.8 million for the company. I believe this was the main reason behind the loss. With the exception of residential data services, all three of CABO's segments underperformed financially in FY22, and the company's net income decreased, which is cause for worry.
Technical Analysis
Trading View
CABO is trading at the level of $655.5. This could be the ideal arrangement for investors who prioritize technical analysis over fundamentals when making investment decisions. Although this setting appears ideal for technical traders and investors, the company's fundamentals appear weak, so I will advise against investing in it. It has decreased by more than 70% since January 2021, and now the trend appears to be changing. The stock is presently close to a strong support zone, around $620, and is creating a double-bottom pattern, which is regarded as bullish. Therefore, there is a good possibility that the stock will increase by 60% from its current price. Therefore, it is an excellent trade in terms of risk to reward. My opinion is that if one wishes to invest in it, one should set a stop loss of 10% and anticipate at least 30% returns. This will result in a great risk-to-reward trade.
Should One Invest In CABO?
Seeking Alpha
The revenue estimate for FY23 is around $1.6 billion, which is less than FY22 revenue. In FY23, they anticipate a revenue increase that will remain flat. In my opinion, there are a few things that might have an impact on how it operates in 2023. Additionally, they lost about 1700 customers on a quarterly sequential basis. I think that the macroeconomic trends led to a slowdown in new home construction and move activity, which had an effect on their customer count and a corresponding slowdown in gross connects. The fundamentals of the company look weak, and they are expecting flat revenue growth in FY23, which is a matter of concern.
Talking about the valuation. I will use two valuation ratios to judge its valuation. The first is the PEG ratio which is calculated by dividing P/E by the annual EPS growth of a company. They have a PEG ((FWD)) ratio of 1.98x compared to the sector ratio of 1.59x. The second is the Price / Sales ratio which we get by dividing a firm's market capitalization by the annual sales. They have a Price / Sales ((FWD)) ratio of 2.21x compared to the sector ratio of 1.17x. After looking at both ratios, I believe they are overvalued. The company's fundamentals appear weak with an adverse growth trajectory, and the valuation seems high. Therefore, after considering all the factors, I believe it is best to avoid the company for now.
Risk
Most telephone companies and electric power utilities that own utility poles are required by federal law to give cable networks access to poles and underground conduits. According to federal law, these utilities must also charge cable operators fair prices for using the area on such poles or in such underground conduits. The FCC’s pole attachment rules contain a formula for calculating pole rental rates that provide similar rates for telecommunications attachments and cable attachments and prohibit utility companies from charging higher rates for pole attachments used to provide broadband internet access service. In order to facilitate new attachments, the FCC has also enacted rules, such as a one-touch make-ready process for new attachments. Changes to the pole attachment rate structure generally could result in a materially negative effect on its operations and an increase in its annual pole attachment costs.
Bottom Line
They provided disappointing quarterly and yearly results. All segments except residential data services underperformed. For FY23, the management anticipates flat revenue growth. Additionally, the valuation seems high. Hence after analyzing all the parameters, I assign a hold rating on CABO.
For further details see:
Cable One: Poor Growth Trajectory And Weak Fundamentals