Credit Suisse media analyst Omar Sheikh initiated coverage of WideOpenWest with an “outperform” rating and a $20 price target Monday, adding that the overbuilder’s potential free cash flow generation outshines any potential competitive risks.
Sheikh estimated that WOW, which has about 474,000 video and 729,000 broadband customers in 10 states, could generate as much as $250 million in levered free cash flow through 2020, driven by growing demand for broadband and declining capital intensity.
In his note, Sheikh said WOW shares are attractively valued at an enterprise value/ EBITDA basis (they trade at about 7.6 times cash flow, compared to about 9 times for peers), adding that if the company executes its business plan, that gap should close.
Key to that strategy is broadband Sheikh wrote, adding that demand for high-speed data is high in WOW’s footprint and its fiber network infrastructure enables faster speeds at lower prices compared to competitors.
The main risk is price competition from Comcast or Charter, either by lowering charges for single play broadband or greater bundle discounts with video or wireless in the future.
“It is hard to see why the former would be rational, and we argue the latter is unlikely to erode WOW!'s 50% price advantage,” Sheikh wrote.
WOW stock was up slightly in early trading Monday (1.4%, or 24 cents each) to $17.83 per share.