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Citi: Opportunity Is Knocking On These Three Telecoms

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Citi: Opportunity Is Knocking On These Three Telecoms
  • Shares have been highly volatile over the past two weeks, and telecom stocks have recorded losses in the past two trading sessions
  • Citi’s Michael Rollins now has Buy ratings for Crown Castle International Corp (NYSE: CCI), Level 3 Communications, Inc. (NYSE: LVLT) and AT&T Inc. (NYSE: T).
  • Rollins recommended to pick stocks that have potential catalysts to create equity value, including restructuring opportunities, revenue momentum and M&A.

Telecom stocks covered by Citi have declined ~10 bps in the week ended August 28, as compared to a decline of ~90 bps in S&P 500. Taking into account the challenge faced by telecom carriers to achieve revenue growth, despite rising data consumption, analyst Michael Rollins recommended “stock-picking.”

Look for telecom companies that have “potential catalysts to create equity value,” Rollins wrote, citing “restructuring opportunities (operating or financial), revenue momentum, and M&A as a source of option value.”

AT&T: Upgraded After Weakness

Rollins upgraded the rating for AT&T from Neutral to Buy, while maintaining the price target at $37. Shares are down 11 percent from its recent closing high on June 25. The analyst believes that the current weakness offers a “near-term value opportunity.”

Rollins believes that the valuation does not reflect:

  1. Improving dividend coverage, with DTV merger-related synergies offering upside potential
  2. “Breathing room” in wireless after Verizon Communications Inc. (NYSE: VZ) reduced its aggressive promotions and AT&T hiked wireless subscriber fees
  3. Consensus EPS for 2016 appearing low

“For AT&T, we see the DTV merger as a catalyst to restructure and improve its cost base over the next 1-2 years,” the Citi report stated.

Level 3: A Top Pick

Rollins maintained a Buy rating and a price target of $66 for Level 3, while moving the company to the status of Top Pick in the Telecom coverage. “We believe infrastructure services companies, such as Towers, data centers, metro-fiber providers and holders of unused spectrum, can better monetize the growth in data consumption relative to the national wireless carriers,” the report said.

Shares have been under pressure after the company missed the revenue expectations in Q2. The analyst said, however, that Level 3 is now “our top ranked idea” and sequential growth in its key N.A. enterprise segment is likely to get back on track during Q3.

Crown Castle: Wireless Data Dilemma

Rollins maintained a Buy rating and a price target of $92 for Crown Castle. The industry did achieve improved ARPU performance in Q2. Despite this, wireless carriers continue to find it difficult to monetize the growth in data consumption and could face significant price competition over the next 12-24 months.

Rollins added, however, Crown Castle is poised to benefit from “an upward bias in mobile broadband capex.”

Latest Ratings for CCI

DateFirmActionFromTo
Apr 2021Morgan StanleyMaintainsOverweight
Apr 2021JefferiesInitiates Coverage OnBuy
Mar 2021KeyBancUpgradesSector WeightOverweight

View More Analyst Ratings for CCI
View the Latest Analyst Ratings

 

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