Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
On Thursday, June 22, Altice USA (ATUS 8.23%) held its IPO, with its first trade listed at $31.60. Now, 25 days later, the stock has gained a whopping $0.40. That could soon change, though, now that it's starting to attract some support on Wall Street. This morning, analysts at JPMorgan, Citigroup, and RBC Capital Markets initiated coverage of Altice USA stock with the equivalent of buy ratings.
But here's something you may not have known: JPMorgan, Citigroup, and RBC all backed Altice USA's IPO in the first place.
Now here are three more things you might want to know.
1. Who's who on Altice?
According to the stock watchers at TheFly.com, no fewer than seven separate analysts initiated coverage of Altice today. JPMorgan, Citigroup, and RBC were the only analysts to endorse the stock (rating Altice overweight, buy, and outperform, respectively). All four of the other initiators -- Goldman Sachs, Barclays Capital, Merrill Lynch, and Morgan Stanley -- gave Altice less-enthusiastic endorsements than basically translated to "hold."
That's hardly a ringing vote of confidence, especially when you notice that, according to Altice USA's IPO prospectus filed with the SEC, all seven of these analysts were "Joint Book-Running Managers" of the Altice USA IPO. Which is to say, these were the folks who underwrote the IPO, and helped to sell Altice shares to the public. (Investment banks are supposed to have a "Chinese wall" between research and investment banking, so in theory, the research side is operating independently.)
JPMorgan and Morgan Stanley were Altice's two biggest backers, underwriting 14.2 million shares each. Citi and Goldman underwrote 10.9 million shares each, while Merrill, Barclays, and RBC took on 2 million shares apiece. As such, you'd expect all seven of these firms to be pretty enthused about Altice's prospects -- but they're not.
2. What Altice's fans are saying
According to the ratings issued this morning, the six analysts named above have posited one-year price targets of between $44 a share (Citi) and $31 a share (Morgan Stanley).
Citi, the most optimistic of the bankers named, argues that Altice USA shares could rise as much as 38% in value over the next year. Citi thinks this because the new company (formed from what used to be Cablevision when Dutch cable provider Altice NV bought it in 2016 for $17.7 billion) has "ample room" to grow its free cash flow as Altice reorganizes its new acquisitions and cuts costs out of the old Cablevision network. JPMorgan -- also optimistic about Altice and suggesting a $39 target price -- says Altice will continue to make acquisitions, find "synergies," and grow its cash flow.
3. What the other bankers are saying
So far, the only substantive comment we've seen from Altice's less-enthusiastic underwriters is Barclays' observation that the stock looks "fairly priced at present levels."
What you should do now
So what's an investor to do, when many of the folks who tried to sell us a stock four weeks ago now seem less enthusiastic about it just four weeks later? Let's take a good hard look at Altice ourselves.
Here's what we know about Altice, as reflected in its stats provided by data mine S&P Global Market Intelligence:
Altice currently carries a market capitalization of only $23.4 billion. That said, with $22.9 billion in long-term debt, but cash and equivalents of less than $500 million, the stock's enterprise value is a whopping $45.8 billion.
Valuation-wise, Altice lost $832 million last year, and its trailing-12-month losses come to $768 million. The analysts are right about one thing, though: While depreciation and amortization of significant capital investments are depressing Altice's GAAP "earnings," the company is doing a good job of generating cash from those historical investments in the present day. Altice's trailing free cash flow comes to $447 million.
Be that as it may, valued on enterprise value, Altice stock still costs more than 100 times the amount of cash profit it produces in a year, which is pretty steep price to pay. (Cable industry giant Comcast for example, sells for an enterprise value-to-free-cash-flow ratio of only 23.9.) On the other hand, Comcast is projected to grow its profits at only 10.5% annually over the next five years. Altice USA -- for which estimates are only just now beginning to come out -- currently is pegged as a 55% grower on S&P Global.
That fast growth rate probably explains both the stock's premium valuation, and why a couple of analysts, at least, are willing to recommend it even at its high stock price. Whether the price is justified will depend on whether Altice can produce the promised growth.