Knology Pullback Prompts Upgrade

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Miller Tabak media analyst David Joyce raised his rating on Knology to “buy” from “neutral,” and increased his 12-month price target on the stock from $19 to $21, citing that the recent pullback in the West Point, Ga.-based overbuilder’s shares could present a buying opportunity.

In a research note, Joyce said that Knology shares have fallen back by more than $1 each in the past month, but added that the sector is moving toward a period where 2008 estimated cash flow multiples are an increasingly important valuation metric. That should bode well for the stock.

Once trading as high as $19.73 per share in May, Knology stock is currently trading in the $16 to $17 per share range.

Despite that dip, the shares are still well above their $10.47 per share price at the beginning of the year.

“We had expected that the stock needed to take a 'breather’ before we upgraded it again,” Joyce wrote.

Joyce noted that at $21 per share, the overbuilder would be valued at about 9.7 times 2008 estimated cash flow, below the 10.1 times estimated 2007 multiple the stock is trading at currently.

“Knology is currently at 8.5 [times] 2008 [cash flow], so we are looking for just over one point of expansion,” according to Joyce. “We still think it can be a nearly 12% compound [cash flow] grower over the next five years as it executes in its legacy as well as recently acquired new markets.”