Morningstar | Initiating Coverage of Altice USA With a $25 Fair Value Estimate; Narrow Moat Rating
We are initiating coverage on Altice USA with a $25 fair value estimate, narrow economic moat, and stable moat trend. Altice USA has nicely pulled together two very different cable operations over the past three years, creating a firm that enjoys the advantages typical of a cable company with industry-leading profitability metrics. We expect the firm’s network architecture, coupled with steady advances in technology, will enable it to steadily add network capacity at modest incremental cost, allowing it to meet customers’ Internet access needs while continuing to generate attractive returns on capital. We also believe the efficient scale attributes of the telecom business and the limits of wireless technology will prevent the competitive environment from changing materially.The legacy Cablevision business, that accounts for around 60% of Altice USA, serves the New York metro area, which is more competitive than average, facing Verizon’s FiOS network across more than half this territory. Rather than rely on the efficiency of its existing network, Altice has chosen to rebuild its network in New York with fiber-to-the-home. We agree that New York likely can be built relatively cheaply, but the potential return on this investment is still questionable in our view. However, the firm’s FTTH effort has started slowly, allowing the firm time to adjust its plans if needed.
The remainder of Altice USA’s business sits at the opposite end of the spectrum, serving smaller cities and less densely populated areas. Competition in these locations tends to be weaker than average, customers also tend to spend less on telecom services, as seen in customer penetration rates that are similar to other cable companies. Also, the cost to build and operate networks in less densely populated areas are generally higher than in urban areas. Finally, we suspect that more of these locations will be susceptible to wireless competition in the future.
Altice USA is a holding company. Through its subsidiaries, the company provides broadband communications and video services and markets its services primarily under two brands: Optimum, in the New York metropolitan area, and Suddenlink, principally in markets in the south-central United States. The company delivers broadband, video, and telephony services to the residential and business customers. The company also provides fiber connectivity, bandwidth and managed services to enterprise customers through its Lightpath business (also marketed as Altice Business) and the company provides advertising time and services to advertisers. The company has launched Altice Mobile, a mobile offering, to consumers across its footprint.
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