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The Ratings Game: Altice USA stock extends slide toward record low as analyst says now isn’t the time for ‘highly levered fix-it stories’

Shares of Altice USA Inc. extended their slide Friday toward a record low, after an analyst chimed in with what he said was an “overdue” downgrade.

MoffettNathanson’s Craig Moffett lowered his rating on the cable company’s shares on Friday to neutral from buy, writing that “Altice USA is the wrong stock for the times.” Moffett is worried about the company’s revenue and spending trends, and what these could mean for Altice’s
ATUS,
-2.79%

free cash flow.

“There is no feeling worse for a sell-side analyst than closing the barn door after the horse has long bolted,” Moffett wrote. “Our downgrade is overdue.”

Altice USA shares are down 2.8% in Friday afternoon trading, after declining 17.9% in Thursday’s session.

Moffett is concerned about the sequential decline in broadband average revenue per user shown in the company’s Wednesday afternoon earnings report. He noted that since Altice must invest in customer-facing areas like retail stores, its “costs are rising even as revenues decline.”

In addition, the company is set up for increased capital spending around fiber. “Their fiber re-build strategy may well be the right one for their circumstances, and accelerating that rebuild is prudent,” Moffett wrote. But higher capital expenditures and lower earnings before interest, taxes, depreciation, and amortization (Ebitda) could pressure free-cash flow “for years,” in his view.

While the company doesn’t have immediate liquidity issues and Moffett believes that Altice USA ultimately will work through its challenges, he deems the company’s leverage ratio “too high.” Altice’s ratio of debt to 2021 Ebitda was 5.5 times, per his note to clients.

Moffett said that the company will need to put cash toward debt reduction instead of share buybacks.

“Unfortunately, the road ahead for Altice is long. And uphill,” he wrote. “Against a market backdrop of rising rates and commensurately falling risk appetites, we are no longer so sanguine that the market will be willing or able to look through this challenging period.”

Moffett added that while there is “a time for highly levered fix-it stories,” that isn’t the current climate.

Friday’s downgrade was Moffett’s second note on Altice USA this week. Immediately following Wednesday afternoon earnings report, he put out a note asking if Altice was the cable industry’s “new canary.”

“With more fiber-based competition than anyone else, Altice offers what has come to be seen, at least by Cable bears, as a glimpse into Cable’s future,” he wrote Wednesday. “Everyone, or so goes the narrative, will eventually look like Altice…
and broadband growth will go negative for all.”

“With that backdrop in mind, Cable investors will be alarmed to see what looks an awful lot like a dead canary,” he continued.

Altice USA shares have tumbled 33.4% over the past three months, while the S&P 500 index
SPX,
-0.43%

has dropped 7.3%.

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