THE HEDGEYE EDGE
We have had a long bias on Altice (ATUS) since March 2019 as management's strategic initiatives were bearing fruit at the same time growth comparisons were easing, and the company was initiating an attractive capital return program.
However, much of what we liked is now becoming a risk to the company's growth algorithm (2-3% revenue growth / 4-5% EBITDA) as we head into 2020. Therefore, we are switching sides and moving ATUS to an active short targeting 20-30% downside in the next 6-9 months.
In addition to missing their Q3 numbers, guidance a “churn problem,” we’ve seen two to three times increase in the number of complaints filed and is reaching the number of Comcast, which is remarkable given that Comcast is about four to five times the size of Altice. It’s a disaster to launch any type of new product and have this type of negative reaction because word spreads like wildfire. I think it’s a big risk to the long term MVNO strategy in general.
We expect below-consensus revenue, EBITDA and free cash flow growth in 2020 due to:
- Pay-TV subscriber losses to re-accelerate through 1H20.
- Aggressive "price for life" promotional activity to weigh on residential ARPU.
- Broadband revenue growth to slow due to market saturation and diminishing marginal returns from faster broadband speeds.
- CapEx to remain elevated due to fiber-to-the-home (FTTH) and Altice One rollout.
- Longer path to profitability and scale on MVNO (incl. higher working cap requirements).
- Fewer cost-cutting opportunities following restructuring and return to a cash taxpayer in 2021.
- Less favorable interest rate environment (rate of change perspective) following a ~130bps YoY decline in 2-year Treasury rates in 2019.
- A slower pace of share repurchases given current leverage profile and our expectation for deteriorating fundamentals.
