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By George Leong, B.Comm. Published : December 24, 2019
CommScope Holding Company Inc Could be Next Big 5G Play
The race to 5G supremacy has become a major goal for the U.S. as countries and companies play catch-up to leading Chinese 5G company Huawei Technologies Co., Ltd..
The U.S. is using all methods to halt the rise of Huawei, a strategy that will provide tailwinds for many 5G players, including mid-cap CommScope Holding Company Inc (NASDAQ:COMM).
But despite the company’s potential, COMM stock has performed dismally, down 15.4% this year and well off from its range high of $27.00.
The price weakness in CommScope stock provides a nice entry point for aggressive traders searching for a good risk/reward trade.
My bull thesis for CommScope is driven by the company’s $7.4-billion takeover of Arris International Limited in April 2019.
COMM develops connectivity solutions for wireless and cable operators. The company also moved into modems and set-top boxes after purchasing Arris. The global push into 5G will provide a strong catalyst for the company.
A look at the technical picture shows COMM stock breaking down from $27.00 in April, marked by a major downside trade gap.
CommScope stock subsequently fell below $10.00 in September, but it has since staged a rally and a break at the trendline resistance.
Chart courtesy of StockCharts.com
If things pan out, COMM stock could recover to $16.00–$18.00, followed by rising to the trade gap at $23.00, representing a move of about 65% from its current price.
A Successful Integration of Arris Would Drive COMM Stock
The key for CommScope will be its ability to integrate Arris and work toward reducing CommScope’s massive debt of more than $10.0 billion.
While the debt risk is high, COMM will see its revenues nearly double due to the acquisition. CommScope was already driving some organic growth prior to purchasing Arris.
| Fiscal Year | Revenues (Billions) | Growth |
| 2014 | $3.83 | |
| 2015 | $3.81 | -0.6% |
| 2016 | $4.92 | 29.3% |
| 2017 | $4.56 | -7.4% |
| 2018 | $4.57 | 0.2% |
(Source: “CommScope Holding Company, Inc.” MarketWatch, last accessed December 20, 2019.)
Revenues are estimated to come in at $8.3 billion in full-year 2019, followed by 12% growth to $9.3 billion in 2020. (Source: “CommScope Holding Company, Inc. (COMM),”Yahoo! Finance, last accessed December 19, 2019.)
CommScope produced positive earnings before interest, taxes, depreciation, and amortization (EBITDA) over the past five years.
| Fiscal Year | EBITDA | Growth |
| 2014 | $868.3 Million | |
| 2015 | $702.3 Million | -19.1% |
| 2016 | $1.1 Billion | 56.1% |
| 2017 | $916.6 Million | -16.4% |
| 2018 | $868.7 Million | -5.2% |
(Source: MarketWatch, op. cit.)
The company has also generated earnings-per-share (EPS) profits on both a generally accepted accounting principles (GAAP) and adjusted basis.
| Fiscal Year | GAAP Diluted EPS | Growth |
| 2014 | $1.24 | |
| 2015 | -$0.37 | -129.8% |
| 2016 | $1.13 | 405.4% |
| 2017 | $0.98 | -12.9% |
| 2018 | $0.72 | -27.1% |
(Source: MarketWatch, op. cit.)
For 2019, CommScope is expected to earn $2.06 per diluted share, compared to $2.27 per diluted share in 2018. The positive news is that profits are slated to rally to $2.18 per diluted share in 2020. (Source: Yahoo! Finance, op. cit.)
The company has also been delivering positive free cash flow.
| Fiscal Year | Free Cash Flow (Millions) | Growth |
| 2014 | $252.5 | |
| 2015 | $245.6 | -2.7% |
| 2016 | $571.9 | 132.9% |
| 2017 | $517.6 | -9.5% |
| 2018 | $411.8 | -20.4% |
(Source: MarketWatch, op. cit.)
Analyst Take
If CommScope can integrate the two businesses, COMM stock could surge, especially given the focus on 5G tech.
CommScope stock trades at an attractive 6.5 times its consensus 2020 EPS estimate and at a mere 0.29 times trailing sales, which is cheap.
The upside prospects for COMM stock are significant. The share price could double and not look expensive.
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