Bear Stearns analyst Stefan Anninger started coverage of RCN with an “outperform” rating and an $18 price target last week, adding he believes the overbuilder can generate 5% to 7% revenue growth, 10% cash-flow growth and expand cash-flow margins to 30% through 2012.
Anninger wrote in a research report that there are four key components to his thesis: RCN plans to expand its footprint by 50,000 to 75,000 per year for the next several years, adding 400,000 new homes passed by 2012; its commercial services business is expected to maintain top-line growth of 8% to 11% through 2012; margin expansion will continue to build value for the company and the stock has a compelling valuation (currently trading at 6 times estimated 2008 cash flow).
The analyst’s $18 price target for the stock represents nearly a 30% upside to the current price of $14.06.
Anninger sees another two catalysts: 2008 analysts’ consensus estimates are too low and could be revised upwards, and RCN will begin reporting its commercial services segment separately, highlighting value and providing an opportunity for a higher multiple.
“This should give investors a better picture of the performance of a business that we believe is growing [cash flow] at more than 15% per year,” Anninger wrote.