Rising Smart Home Demand Will Spur Fiber Upgrades

Key Takeaways

• Rapid adoption of bundled wireless and network expansion is likely to drive stronger customer growth and revenue acceleration than generally expected.
  
• Continued efficiency gains, digital transformation, and product upselling create substantial potential for outperformance in both margins and long-term earnings.
  
• Persistent revenue and margin pressures stem from cord-cutting, limited market diversification, high capital needs, subscriber loss, and growing regulatory risks.

Catalysts

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

• While analyst consensus expects continued Canadian internet subscriber growth and network expansion, the market is underestimating the scale and speed of Cogeco's new bundled wireless offering and lit up Ontario network projects, which are poised to deliver not just incremental but step-change customer acquisition, supporting a higher-than-forecast acceleration in top-line revenue growth.
  
• Analyst consensus sees transformation-driven synergies as ahead of plan, but with material OpEx and CapEx efficiencies now consistently exceeding expectations and AI-driven automation efforts still in early stages, there is significant further upside for sustained margin expansion and free cash flow beyond current market assumptions.
  
• The proliferation of smart home technologies, connected devices, and remote work is likely to spark an unprecedented upselling opportunity for premium broadband packages, meaning higher-than-expected ARPU and robust, sustained revenue growth.
  
• Ongoing fiber-to-the-home upgrades and digitization initiatives not only reduce churn and customer acquisition costs but uniquely position Cogeco to capitalize on future government-funded rural broadband expansion programs, creating a long runway for both steady revenue increases and margin gains.
  
• Early evidence of successful digital-only and low-touch operating models, coupled with management's willingness to adapt sales strategies (as with oxio and emerging U.S. campaigns), sets the stage for disruptive cost and efficiency breakthroughs-enabling long-term EBITDA and earnings growth, and potential for more aggressive capital returns than consensus incorporates.

Cogeco Communications Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Cogeco Communications compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Cogeco Communications's revenue will decrease by 0.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 11.1% today to 16.3% in 3 years time.
• The bullish analysts expect earnings to reach CA$475.0 million (and earnings per share of CA$11.16) by about August 2028, up from CA$327.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 10.2x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the CA Telecom industry at 12.1x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.6%, as per the Simply Wall St company report.

Cogeco Communications Future Earnings Per Share Growth

Risks

• Cogeco faces secular headwinds from ongoing cord-cutting and the continued decline of traditional cable TV, as highlighted by revenue declines in legacy video and wireline phone subscribers, which is likely to pressure long-term revenue growth and reduce average revenue per user.
  
• The company's limited geographical diversification, with significant reliance on Canadian regional markets and smaller U.S. markets, makes it more vulnerable to region-specific economic shocks, regulatory changes, and competitive encroachment, thus threatening revenue stability and overall earnings.
  
• Persistent high capital expenditure requirements to upgrade and expand network infrastructure, even amid near-term operational efficiencies, could continue to strain free cash flow and raise leverage, challenging net margins in the medium to long term.
  
• Cogeco continues to lose U.S. Internet subscribers due to intensified competition from both large incumbents and disruptive new entrants including municipal fiber and fixed wireless, which has driven recent top-line revenue declines and may continue to erode U.S. market share and future earnings.
  
• Regulatory risks are increasing, as demonstrated by the CRTC's refusal to adjust wholesale access rules in Cogeco's favor, increasing pressure from potential price controls or open-access mandates, which could compress profitability and undermine both net margins and EPS.

Valuation

• The assumed bullish price target for Cogeco Communications is CA$95.42, which represents two standard deviations above the consensus price target of CA$76.64. This valuation is based on what can be assumed as the expectations of Cogeco Communications's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$98.0, and the most bearish reporting a price target of just CA$64.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CA$2.9 billion, earnings will come to CA$475.0 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 6.6%.
• Given the current share price of CA$63.16, the bullish analyst price target of CA$95.42 is 33.8% 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.