Drexel Hamilton's Sine Pounds Zayo Table: Reiterates Sell On Historical Behavior After Earnings

Drexel Hamilton’s Barry M. Sine pointed out that Zayo Group Holdings Inc’s ZAYO shares “have a history of rallying between earnings, and selling off on earnings days.”

The analyst reiterated a Sell rating on the company, with a price target of $20.

Stock Concerns

Sine believes that Zayo Group’s roll-up acquisition strategy, along with its lower ROI dark fiber model, warrant a stock valuation that is lower than its peers.

Sine also pointed out that the company “has been focusing more on large, speculative contracts which are those with a negative IRR on the anchor tenant. While we think these make longterm sense, as subsequent customers should drive IRR into the double digits, rising CAPX and lagging revenue could concern investors.”

1Q Expectations

The analyst expects the company to report revenue of $468 million for C1Q, driven by the Allstream and Viatel acquisitions. The EBITDA for the quarter is expected at $238 million.

Mentioning that Allstream and Viatel were similar to the acquisition of network assets, Sine stated that these would take longer to monetize than the acquisition of “contributing businesses that could be accretively integrated into Zayo's business.”

The analyst also noted that venture investors continued to own about half of Zayo Group’s shares outstanding and were likely to sell on good news or exit if the shares do not move. This would limit the stock’s upside.