Cogeco Communications Inc. (TSX:CCA), the eighth-largest cable distributor in North America, watched its stock lose 6% of its value last week, including a decline of more than 5.5% following the release of its fiscal 2018 first-quarter earnings results after the market closed on Wednesday. The stock now sits more than 15% below its 52-week high of $95.21 reached back on October 4, so let’s break down the quarterly results and the fundamentals of the stock to determine if now is the time to buy.
The first-quarter results
Here’s a quick breakdown of eight of the most notable financial statistics from Cogeco’s three-month period ended November 30, 2017, compared with the same period in 2016:
|Metric||Q1 2018||Q1 2017||Change|
|Canadian Broadband Services revenues||$326.94 million||$316.84 million||3.2%|
|American Broadband Services revenues||$157.69 million||$159.98 million||(1.4%)|
|Business ICT Services revenues||$69.88 million||$73.21 million||(4.5%)|
|Total revenues||$553.63 million||$549.09 million||0.8%|
|Adjusted EBITDA||$247.48 million||$249.70 million||(0.9%)|
|Profit for the period||$76.47 million||$75.02 million||1.9%|
|Basic earnings per share (EPS)||$1.55||$1.53||1.3%|
|Free cash flow||$102.30 million||$101.38 million||0.9%|
Revisions to its 2018 outlook
As a result of Atlantic Broadband, one of Cogeco’s subsidiaries, completing its acquisition of MetroCast and expanding its operations across 11 U.S. states, Cogeco revised its outlook for fiscal 2018; here’s a breakdown of what it now expects in fiscal 2018:
|Metric||Original Outlook||New Outlook||Actual Fiscal 2017 Results|
|Revenue||Increase of 3.3% to 4.6%||Increase of 11% to 13%||$2,227 million|
|Adjusted EBITDA||Increase of 2% to 4.5%||Increase of 10% to 12%||$1,005 million|
|Free cash flow||Decrease of 7.8% to Increase of 0.3%||Decrease of 11% to 18%||$374 million|
As you can see, the acquisition is expected to drive Cogeco’s revenue and adjusted EBITDA significantly higher, while its free cash flow is expected to show a steeper decline due to MetroCast’s expansion plans in Florida paired with other costs associated with the acquisition.
Should you buy Cogeco Communications today?
It was a decent quarter overall for Cogeco, but no single financial statistic stood out as impressive, so I think the weakness in its stock can be considered warranted. However, I think the sell-off has led to a very attractive entry point for long-term investors for two fundamental reasons.
First, it’s undervalued. Cogeco’s stock now trades at just 13.2 times this year’s estimated EPS of $6.11 and only 12.6 times fiscal 2019’s estimated EPS of $6.38, both of which are very inexpensive given its long-term growth potential and its strong cash flow-generating ability.
Second, it’s a dividend-growth superstar. Cogeco currently pays a quarterly dividend of $0.475 per share, representing $1.90 per share annually, which gives it a 2.4% yield; A 2.4% yield is solid, and it’s very important to note that the cable giant’s 10.5% dividend hike on November 2 has it on pace for fiscal 2018 to mark the 14th consecutive year in which it has raised its annual dividend payment, making it one of the industry’s best dividend-growth stocks.
Including reinvested dividends, Cogeco’s stock has returned more than 25% since I first recommended it on June 18, 2015, and I think it’s still a strong buy today, so take a closer look and consider using the recent weakness to begin scaling in to long-term positions.
Fool contributor Joseph Solitro has no position in any stocks mentioned.