Attractive valuation heading into spin-off; adding to the Conviction List;
buy calls
We are adding Buy-rated Altice USA (ATUS) to our Americas Conviction List. Our call is based on three key factors: (1) solid fundamentals and attractive valuation vs. CHTR and other high FCF/share growth stories, (2) the planned spin-off from Altice NV, which we see as a potential positive catalyst as it kicks-off a material capital return program, and (3) concerns about the impact of rising interest rates appear overstated based on our capital structure analysis. We maintain our 12-month price target of $28, which implies 41% upside potential. Our Options Strategist recommends buying calls ahead of Spin catalysts.
Three reasons we add ATUS to the CL
1) Solid fundamentals and attractive valuation.We expect ATUS to grow FCF/share at an 18% CAGR through 2022, driven by broadband revenue growth, margin expansion and buybacks. Despite this outlook, ATUS trades at a steep discount to CHTR and other high FCF/share growth peers: 8.0x 2018E EBITDA (comps mostly >9x) and 9.8x taxed FCF/share (comps >20x).
2) Planned spin-off from Altice NV a potential near-term catalyst.We believe concerns about post-spin “flowback” are a
temporary overhang. We see the spin-off (which will increase the float 4x) as a potential catalyst for material capital returns, which could exceed 70% of ATUS’s market cap over the next 5 years.
3) Concerns about the impact of rising interest rates look overstated. Despite having the highest leverage in the US cable sector, ATUS could potentially see its borrowing costs decrease, even if interest rates continue to increase, as it refinances/calls over 1/3rd of its high-cost notes in 2018-2019.