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CCOI

Cogent Communications Holdings NasdaqGS:CCOI Stock Report

Last Price

US$52.77

Market Cap

US$2.5b

7D

1.0%

1Y

-28.1%

Updated

06 Oct, 2022

Data

Company Financials +
CCOI fundamental analysis
Snowflake Score
Valuation2/6
Future Growth3/6
Past Performance5/6
Financial Health0/6
Dividends3/6

CCOI Stock Overview

Cogent Communications Holdings, Inc., through its subsidiaries, provides high-speed Internet access, private network, and data center colocation space services in North America, Europe, Asia, South America, Australia, and Africa.

Cogent Communications Holdings, Inc. Competitors

Price History & Performance

Summary of all time highs, changes and price drops for Cogent Communications Holdings
Historical stock prices
Current Share PriceUS$52.77
52 Week HighUS$80.50
52 Week LowUS$49.02
Beta0.34
1 Month Change-2.48%
3 Month Change-12.92%
1 Year Change-28.10%
3 Year Change-5.06%
5 Year Change5.75%
Change since IPO-47.75%

Recent News & Updates

Sep 13

Cogent Communications Holdings: A Speculative Strong Buy For Dividend Investors

Summary The share price of Cogent Communications Holdings is down ~33% from its 52-week high. The price reached a new low after the recent ~9% drop, which makes the dividend even more interesting in terms of risk/reward. I share why I believe that CCOI, with almost 7% dividend yield and a consistent history of raising dividend every quarter, is a speculative strong buy for dividend investors. Editor's note: Seeking Alpha is proud to welcome PB Investment as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more » Cogent Communications Holdings (NASDAQ:CCOI) is a mid-cap and not well known telecommunications stock that has generated strong long-term returns for shareholders while growing its dividend aggressively over that time period. However, on a trailing twelve month basis it has generated negative returns, and the recent acquisition of T-Mobile's Wireline Business has made the shares price drop even further. CCOI data by YCharts In my view, this is not all bad news, because the stock now offers almost a 7% dividend yield with a consistent growth rate (over 10 years). But before diving into charts and financial data, let me first explain the business context of CCOI. The tiered ISP hierarchy model The global Internet is a collection of separate, but interconnected networks. These networks form the primary transport for the Internet and are independently controlled by Internet Service Providers (ISPs), each with its own policies, services, topologies, and customers. What ties the ISPs together is the same Internet Protocol (IP) addressing scheme and Border Gateway Protocol (BGP) routing framework. Without diving into technicalities, these standard protocols allow all these networks to interconnect with each other directly or indirectly. Internet Connectivity Distribution (Wikimedia Commons) ISPs are classified into a 3-tier model that characterizes them based on the type of Internet traffic that they transport: Tier-1: these ISPs are at the top of the hierarchy and they have a global reach. They own under-sea cables and other intercontinental fiber optic infrastructure, providing (high volume) traffic to all other ISPs. ISPs of the same tier connect to each other and allow free traffic passes between them. Conversely, lower-tier ISPs have to pay a cost to higher-tier ISPs to allow their traffic to pass from one geolocation to another. Tier-1 ISPs might also lease their unused lines to other ISPs (this is called dark fiber leasing). Examples of Tier-1 ISPs: Cogent Communications Holdings Inc, and Lumen Technologies (LUMN). Tier-2: these ISPs connect between Tier-1 and Tier-3 ISPs, and they have regional or country reach. Examples are Vodafone (VOD), Easynet, and BT (BT). Tier-3 ISP: these ISPs provide traffic data to end users, connecting them to the internet by charging some money. These ISPs work on purchasing model, and they obviously have to pay some cost to Tier-2 ISPs based on the generated traffic volume. Examples of Tier-3 ISPs: Comcast (CMCSA) and Deutsche Telekom (OTCQX:DTEGY). CCOI focuses mainly on Tier-1 traffic, covering 20% of all internet traffic, operating in 51 countries in 217 markets. However, some other ISPs - Verizon (VZ) and AT&T (T) - operate across all tiers. Business highlights and the impact of COVID-19 on financials Cogent classifies their customers into 2 types: NetCentric (access providers and content providers whose businesses rely primarily on Internet access) and Corporate (small businesses to Fortune 100 companies). NetCentric customers Cogent sells connectivity to content providers and other wholesale customers, which are represented under the NetCentric business. These customers are streaming companies and content distribution service providers, as well as other service providers who connect the consumers to the internet via fixed line and mobile networks. NetCentric business represented 42.6% of CCOI's Q2 revenues, and continued to benefit from the strong growth in streaming subscriptions and in international network traffic. Quarterly traffic from NetCentric customers increased sequentially by 3% (2.5% for the previous quarter) and year-over-year by 19%. NetCentric revenues grew by 0.3% on a (U.S. GAAP) quarterly basis and 10.2% on a yearly basis. Since ~50% of the NetCentric business is coming from outside the U.S., adjusting for foreign exchange on a constant currency basis, the revenues increased by 2.5% on a sequential basis, and by 16.2% on a yearly basis. Corporate customers Corporate customers are typically professional service firms, financial service firms and educational institutions located in multi-tenant office buildings or connecting to Cogent's network through their CNDC footprint. The Corporate business has been and continues to be impacted by the effects of the COVID-19 pandemic. Indeed, while the Corporate business represented 57.4% of Cogent's Q2 revenues, it declined by 1.1% on a U.S. GAAP quarterly basis (and by an unknown amount on a yearly basis - the same holds for foreign exchange adjustments). This was mainly caused by the change in USF rates (subsidies for under-served/sparse areas) and by the decline in the number of offices due to COVID-19. In particular, adjusting for the negative USF impact, the decline in Corporate revenue for the quarter was only 0.007% sequentially. With regards to COVID-19, it is important to note that Corporate customers buy bandwidth on an unmetered basis, hence whether there are 10 employees in their office or 100, the customers pay Cogent the same amount of money. Another positive trend is that companies have defined a hybrid work schedule for their employees, which means that some corporate customers took additional ports from Cogent in a carrier-neutral data center solely for supporting their VPN connections. As stated in the Q2 2022 results call, CEO Dave Schaeffer considers this as "an additional opportunity to sell more ports to those Corporate customers, offsetting the decline in office-to-office VPNs as companies reduce the number of offices". However, while Corporate business is trending towards pre-pandemic levels, it is growing at a slower pace than expected. Cogent believes that the Corporate business is still probably several quarters away from returning to its historic sequential growth rate (of 2%, see image below). Sequential Corporate Revenue Growth (From Q2 Cogent Investor Presentation) Total revenue and EBITDA Overall, on a U.S. GAAP basis the total revenue for Q2 2022 decreased by 0.5% on a quarterly basis, but increased by 0.4% on a yearly basis. On a constant currency basis, the quarterly revenues actually increased sequentially by 0.4%, and by 2.7% on a yearly basis. It is clear that the revenue is heavily impacted by the (negative) foreign exchange movements. If adjustments for the negative impact of USF rates are considered, the Q2 revenues would have grown by 0.6% sequentially, and 3.6% year-over-year, which is equivalent to the rate of growth in Q1 2022. Overall, the revenue keeps increasing over time at a steady pace (7.3% CAGR over 10 years). CCOI Revenue (Annual) data by YCharts EBITDA margin increased by 110 basis points from Q1 2022 to 39.4% for Q2 2022, and by 70 basis points from Q2 2021 to Q2 2022. EBITDA increased by 2.3% from Q1 2022 to $58.5 million for Q2 2022 and by 2.2% from Q2 2021 to Q2 2022. As for revenue, the EBITDA keeps increasing over time at a steady pace (9.2% CAGR over 10 years). CCOI EBITDA (Annual) data by YCharts An additional positive note on business safety is that the top 25 customers represented only less than 6% of the revenues for Q2 2022. Total long-term debt One point of attention is represented by the steadily increasing long-term debt. Part of the debt can be explained by the costs of raw material that increased due to higher inflation, which put even more pressure on CCOI's debt. CCOI Total Long Term Debt (Annual) data by YCharts In June 2022, Cogent replaced some of their debt, extending the maturity date, but increasing their costs. Of course, this may look worrisome, especially considering the current rising rate environment and the increased pressure on the cash left to pay the dividend to investors. On the other hand, CCOI went through an explosive growth and the company managed to convert the increasing debt in a profitable business, and to keep rising the dividend payments even in 2020. One slightly positive note is that the total debt increased at a lower pace than the rate on increase in EBITDA. CCOI - Valuation In the case of CCOI, earnings per share don't tell much due to depreciation and amortization charges (for the installed infrastructure) that make that metric less useful. Instead, the revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) is more useful, and especially the Enterprise Value (EV) to EBITDA ratio shall be looked at. Cogent Communications' latest twelve months EV/EBITDA is 16.8x, and it averaged 18.8x from 2017 to the end of 2021 (see below). CCOI EV to EBITDA data by YCharts The current EV/EBITDA is 12.7x, which is well below the average of 18.8x of the last 5 years (~39% lower!). This makes the current shares price quite attractive, as ~39% seems like a quite big safety margin. CCOI EV to EBITDA data by YCharts Given the average and current valuation, the company is a strong buy below $60 and a buy below $65. Indeed, if CCOI were to return to its average EV to EBITDA ratio, its share price would be a bit above $70, and this is without considering no growth at all, which is unlikely (see the growth section below). Dividend Another metric that makes CCOI a very attractive buy is the current dividend yield being very close to 7%, which is ~56% higher than the average yield of 3.88% over the past 10 years. CCOI Dividend Yield data by YCharts If we were to apply the same methodology as for the EV to EBITDA ratio, the company is a strong buy below $65 and a buy below $70. If the stock were to reach its average dividend yield, its price would be $78 (again, considering no growth at all, even of the dividend which is extremely unlikely). Moreover, the dividend increases do not seem to be stopping, continuing the impressive streak of 40 consecutive quarterly increases (and at an impressive rate). CCOI Dividend data by YCharts This of course raises doubts on the dividend's safety, so let's calculate the dividend payout ratio to help with this. As for all companies that run a capital-intensive business (think about electricity companies) the investments in infrastructure are financed on debt as they are considered to be low risk. This means that the dividend payout ratio should be calculated based on the cash flow from operations, and not based on net income or similar metrics. CCOI Total Dividends Paid (Annual) data by YCharts Cash from operations has increased over the past 10 years, but the total dividends paid increased at a faster pace, hence the dividend payout ratio kept increasing as well (to ~88%). This may be worrisome, because if the same trend persists the dividend would become unsustainable in the upcoming few years. Nevertheless, management looks convinced that its business will recover and generate a lot more cash, especially after the recent acquisition of the T-Mobile's Wireline Business. Moreover, the company consistently increased the dividend each quarter for the last 10 years with an impressive ~21% CAGR for that period, ~15 CAGR for the last 5 years, and ~13 CAGR for the last 3 years. While the dividend growth is admittedly slowing down, the consistent dividend increases over the last 40 months, and especially in difficult times (COVID-19), demonstrates the long-term optimism that the company has in its business. Moreover, the board acknowledged that there is substantial liquidity on the balance sheet, and substantial incremental borrowing capacity. Quoting the CEO Dave Schaeffer again from Q2 2022 results call: "The pace of that [dividend] growth may vary. It is not today". Future growth and shares appreciation Analysts project that Cogent will grow its revenue at a 6.3% annualized rate and that the dividend will grow at a 9.6% annualized rate. Admittedly, the dividend growth is lower than the last 3Y and 5Y CAGR, but it is still a very considerable rate, especially considering the current high yield. As mentioned during the Q2 2022 results call, the CEO is also "encouraged by the fact that [the company's] sales force productivity numbers increased to 4.9 installed orders per full-time equivalent rep per month, up from 4.7 last quarter. This is actually the best sales force productivity since the fourth quarter of 2018".

Sep 07

Cogent Communications agrees to acquire T-Mobile's Wireline Business

Cogent Communications (NASDAQ:CCOI) stated Wednesday that it has signed a definitive deal to acquire T-Mobile's Wireline Business. Financial terms of the transaction were not disclosed; however, Cogent said that it is not planning to issue new debt or equity in order to finance the acquisition, and the transaction is not expected to be dilutive to Cogent's existing stockholders. The Wireline Business offers the Sprint U.S. long-haul network that provides an owned network asset. With this acquisition, it will replace Cogent's current leased network beside providing the ability to expand its product set, including the sales of optical wave transport services to new and existing customers.  Closing of the acquisition transaction is expected in the second half of 2023. In addition to the purchase, the parties have agreed to a separate agreement under which Cogent will offer IP transit services to T-Mobile for $700M over the period of 54 months. Earlier: Cogent Communications GAAP EPS of $0.24 in-line, revenue of $148.45M misses by $2.23M

Shareholder Returns

CCOIUS TelecomUS Market
7D1.0%-1.1%3.3%
1Y-28.1%-35.8%-20.4%

Return vs Industry: CCOI exceeded the US Telecom industry which returned -33.9% over the past year.

Return vs Market: CCOI underperformed the US Market which returned -18.8% over the past year.

Price Volatility

Is CCOI's price volatile compared to industry and market?
CCOI volatility
CCOI Average Weekly Movement4.7%
Telecom Industry Average Movement6.2%
Market Average Movement6.9%
10% most volatile stocks in US Market15.6%
10% least volatile stocks in US Market2.9%

Stable Share Price: CCOI is not significantly more volatile than the rest of US stocks over the past 3 months, typically moving +/- 5% a week.

Volatility Over Time: CCOI's weekly volatility (5%) has been stable over the past year.

About the Company

FoundedEmployeesCEOWebsite
1999988Dave Schaefferhttps://www.cogentco.com

Cogent Communications Holdings, Inc., through its subsidiaries, provides high-speed Internet access, private network, and data center colocation space services in North America, Europe, Asia, South America, Australia, and Africa. The company offers on-net Internet access and private network services to law firms, financial services firms, and advertising and marketing firms, as well as heath care providers, educational institutions and other professional services businesses, other Internet service providers, telephone companies, cable television companies, Web hosting companies, media service providers, mobile phone operators, content delivery network companies, and commercial content and application service providers. It also provides Internet access and private network services to customers that are not located in buildings directly connected to its network; and on-net services to customers located in buildings that are physically connected to its network.

Cogent Communications Holdings, Inc. Fundamentals Summary

How do Cogent Communications Holdings's earnings and revenue compare to its market cap?
CCOI fundamental statistics
Market CapUS$2.46b
Earnings (TTM)US$44.13m
Revenue (TTM)US$576.36m

55.8x

P/E Ratio

4.3x

P/S Ratio

Earnings & Revenue

Key profitability statistics from the latest earnings report
CCOI income statement (TTM)
RevenueUS$576.36m
Cost of RevenueUS$210.63m
Gross ProfitUS$365.74m
Other ExpensesUS$321.61m
EarningsUS$44.13m

Last Reported Earnings

Jun 30, 2022

Next Earnings Date

n/a

Earnings per share (EPS)0.95
Gross Margin63.46%
Net Profit Margin7.66%
Debt/Equity Ratio-214.4%

How did CCOI perform over the long term?

See historical performance and comparison

Dividends

6.9%

Current Dividend Yield

356%

Payout Ratio