2 Reasons Morgan Stanley Upgraded Zayo Group

Communication infrastructure services provider Zayo Group Holdings Inc ZAYO received a rave review from Morgan Stanley on Tuesday. 

The Analyst

Morgan Stanley analyst Simon Flannery upgraded shares of Zayo Group from Equal-weight to Overweight and upped the price target from $33 to $40.

The Thesis

Zayo Group shares are being upgraded due to two upcoming catalysts, namely a REIT conversion announcement and improving revenue trends, Flannery said in a Tuesday note. (See Flannery's track record here.) 

Reflecting mixed bookings and churn trends, the company's stock has lagged peers, Flannery said. The analyst expects the company to report improving revenue trends in the coming quarters, going by the improvement in the leading indicators for Zayo's revenues.

The company has posted two straight quarters of record bookings — and spending trends for carrier customers are also expected to improve, as they expend more to upgrade networks and take advantage of tax reform, the analyst said.

"Churn, which had disproportionately come from recent acquisitions, is expected to moderate, helping net installs," Flannery said. 

The higher valuation levels gained following a REIT conversion have helped non-traditional fiber names participate more broadly in fiber consolidation, where Zayo Group has benefited from being active, according to Morgan Stanley. 

Morgan Stanley's revised price target of $40 was reached by applying a 12.5 times multiple to its calendar year 2019 AFFO estimate.

The Price Action

Shares of Zayo Group are up over 9 percent year-to-date.

In pre-market trading, the shares were rising 1.70 percent to $35.90.

Related Links:

How The New Communication Services Sector Could Look

Straight Path Communications Buyout Blindsides Short Sellers