Down 15% From its High, Is Cogeco Communications Inc. a Buy?

Cogeco Communications Inc. (TSX:CCA) watched its stock fall over 6% last week, and it’s now down more than 15% from its 52-week high. Is now the time to buy? Let’s find out.

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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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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