Rollout Of Breezeline Mobile Will Expand Future Service Offerings

Key Takeaways

• Network expansion and structured transformation initiatives in Canada and the U.S. aim to boost revenue and operational efficiency.
  
• Launching Breezeline Mobile and marketing Canadian wireless services focus on cross-selling higher-margin products and improving EBITDA.
  
• Intense competitive pressures in North America and changing consumer trends suggest potential declines in revenue, impacting Cogeco's margins and free cash flow.

Catalysts

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

• Cogeco Communications is focusing on network expansion in both Canada (particularly Ontario) and the U.S., which will likely increase its subscriber base and thus potentially boost future revenue.
  
• The company is implementing a structured 3-year transformation program with over 150 initiatives aimed at driving synergies, digitization, and advanced analytics that are likely to improve operational efficiency and expand EBITDA margins.
  
• The rollout of Breezeline Mobile and ongoing efforts to market Canadian wireless services may contribute to future revenue growth and an enhanced product offering, potentially increasing net margins due to cross-selling higher-margin services.
  
• Cogeco has been experiencing strong Internet subscriber growth in Canada, which indicates potential for revenue stability or growth despite broader competitive pressures.
  
• The company's cost reduction initiatives and shift to higher-margin products in the U.S. are expected to stabilize or improve EBITDA over time, thus providing potential for improved earnings.

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 11.7% today to 11.9% in 3 years time.
• Analysts expect earnings to reach CA$356.9 million (and earnings per share of CA$9.13) by about February 2028, up from CA$346.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CA$312 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, up from 7.4x today. This future PE is greater than the current PE for the CA Telecom industry at 9.2x.
• Analysts expect the number of shares outstanding to decline by 2.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.1%, as per the Simply Wall St company report.

Cogeco Communications Future Earnings Per Share Growth

Risks

• The competitive environment remains intense in both Canada and the U.S., leading to pricing pressures and potential declines in revenue, especially in the U.S. where subscriber trends have shown declines, thus impacting revenue stability.
  
• Breezeline, Cogeco's U.S. subsidiary, experienced a revenue decline of 3.4% due to video cord cutting and entry-level service attrition, which could pressure future revenue and EBITDA growth despite operational efficiencies.
  
• Cogeco Media is facing a challenging radio advertising market, which has led to a decrease in revenue; if these challenges persist, they may continue to negatively impact the company’s revenue.
  
• The company's ongoing investments in network expansion and transformation initiatives may increase capital expenditures and operating costs in the near term, potentially affecting net margins and free cash flow.
  
• The shift in consumer behavior due to fixed wireless access (FWA) alternatives in the U.S. could continue reducing the customer base, particularly at the entry service level, impacting both revenue and margins.

Valuation

• The analysts have a consensus price target of CA$78.95 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$356.9 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of CA$61.15, the analyst's price target of CA$78.95 is 22.6% 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.