On Tuesday, JPMorgan adjusted its outlook on Cable One (NYSE: CABO), reducing the stock's price target to $514 from the previous $703, while keeping a Neutral rating. The revision comes after discussions with the company's CFO Todd Koetje following their fourth-quarter 2023 earnings report.
Cable One met subscriber expectations but reported weaker revenue and EBITDA, mainly due to reduced broadband average revenue per user (ARPU) as a result of increased promotional activities.
Cable One's strategy to boost subscriber growth through promotions has led JPMorgan to anticipate an increase in broadband net additions for fiscal year 2024, now expecting 10,000 additions compared to the previous estimate of 4,000. Despite this growth, there are concerns about the impact of the strategic shift on ARPU and the company's financial performance.
The aggressive promotional offers early in the first quarter reflect a pivot in strategy and the competitive environment in Cable One's markets, including the presence of fiber overbuilders and fixed wireless access (FWA) operators.
JPMorgan forecasts a decline in Cable One's broadband revenue to $974 million for fiscal year 2024, which is 3% below prior estimates and represents a 0.5% year-over-year decrease. Adjusted EBITDA is expected to reach $884 million, a 3.5% decline from the previous year, with a slight margin contraction.
The company's shift towards a volume-based growth model through promotional offers aimed at low-end subscribers is intended to balance broadband subscriber growth, but there are worries about the EBITDA trajectory and the potential pressure on backbook pricing as sales, general, and administrative (SG&A) expenses rise due to increased promotional activity.
In conclusion, while the new promotional focus may lead to improved net additions for Cable One, JPMorgan remains cautious. The firm believes that concerns regarding the company's EBITDA trajectory and the impact of strategic changes on ARPU are already reflected in the current stock valuation, which trades at 5.4 times FY24 EBITDA and offers a 12% FY24 free cash flow yield. The revised price target of $514 reflects these considerations.
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