Rural Network Modernization And US Canadian Synergies Will Strengthen Operations

Key Takeaways

• End of investment cycle boosts free cash flow, enabling debt reduction and share buybacks to enhance future earnings.
  
• U.S.-Canada synergies, digitization, and wireless expansion expected to improve margins and revenue growth.
  
• Competitive pressures and challenges in both Canadian and U.S. segments, coupled with cost pressures and foreign exchange impacts, could strain profitability and growth.

Catalysts

Operates as a telecommunications corporation in Canada and the United States.

• The end of an investment cycle for rural network build and network modernization is expected to significantly boost free cash flow over the next two years, potentially allowing for debt reduction and share buybacks, impacting future earnings positively.
  
• Operational synergies from the merger of U.S. and Canadian teams, as well as ongoing transformation programs focusing on U.S.-Canada synergies, digitization, and network expansion, are expected to improve margins and drive cost efficiencies, enhancing net margins.
  
• The ramp-up of wireless services in the U.S. and the upcoming wireless launch in Canada, including successful preregistrations, is expected to grow revenue through increased customer acquisitions and reduced churn in the core cable business.
  
• The completion of the Ontario network expansion program by fiscal 2026 and the addition of new fiber-to-the-home connections are expected to drive long-term revenue growth, supported by higher subscriber penetration rates.
  
• The strategic focus on high-margin services, such as fast internet speeds and digital advertising solutions, is expected to improve customer satisfaction and the overall service mix, positively impacting future EBITDA and profitability.

Cogeco Communications Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cogeco Communications's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.0% today to 13.2% in 3 years time.
• Analysts expect earnings to reach CA$390.3 million (and earnings per share of CA$9.77) by about April 2028, up from CA$327.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CA$276 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.2x on those 2028 earnings, up from 8.4x today. This future PE is lower than the current PE for the CA Telecom industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.14%, as per the Simply Wall St company report.

Cogeco Communications Future Earnings Per Share Growth

Risks

• Competitive pressures in the Canadian market are leading to lower revenue per customer and increased operating expenses, which could impact net margins and profitability.
  
• The U.S. segment, Breezeline, is experiencing a decline in revenue driven by a reduced subscriber base, particularly in entry-level services, which could affect overall revenue growth.
  
• The radio advertising market faces ongoing challenges, with revenue declines due to competitive dynamics, potentially impacting earnings from the media segment.
  
• Despite cost-saving efforts, higher operating expenses to drive subscriber growth and transformation initiatives could pressure EBITDA and net profit margins.
  
• Foreign exchange rate fluctuations have negatively impacted U.S.-denominated debt, which could affect net earnings if not managed effectively.

Valuation

• The analysts have a consensus price target of CA$78.909 for Cogeco Communications based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$92.0, and the most bearish reporting a price target of just CA$71.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$3.0 billion, earnings will come to CA$390.3 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of CA$64.98, the analyst price target of CA$78.91 is 17.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.