'We cannot rule out the risk of bankruptcy' at CommScope, a Raymond James analyst says. However, he believes the 'fundamentals have nearly bottomed' and CommScope 'can avert default.'
Times are tough for many cable tech and telecom suppliers these days. But they have been especially tough on CommScope, which has seen its share price plummet amid a slowdown in operator spending as customers try to melt down inventory that was built up when the pandemic fueled supply chain constraints.
Amid those challenges, CommScope is also looking for ways to slice down a $9 billion debt load. Alongside ongoing cost-cutting efforts, industry sources confirmed recently that the company is exploring a sale of certain assets, including Ruckus Wireless and Access Network Solutions (ANS), a unit that specializes in cable network products such as cable modem termination systems, a new virtual CMTS and a new breed of Full Duplex DOCSIS (FDX) amplifiers that Comcast will use for its ambitious DOCSIS 4.0 upgrade. CommScope is already in the process of selling Home Networks, a unit that develops and sells cable modems, set-tops and other customer premises equipment (CPE), to Vantiva.
CommScope's stock is also struggling. Shares are up nearly 9% today (to $1.83 each) in Friday afternoon trading, but are still well below a 52-week high of $9.34.
But at least one analyst wonders if the worst is over for CommScope and if the company can avoid a potential bankruptcy reorganization.
A good company facing big challenges
Raymond James analyst Simon Leopold upgraded CommScope shares to "market perform" from "underperform" based on a view that CommScope's "risk-reward has come into balance."
"We cannot rule out the risk of bankruptcy, but we believe the fundamentals have nearly bottomed and that the company can avert default," Leopold wrote. "We consider CommScope a good company, yet it faces challenges."
He acknowledges that there's no "easy fix" for CommScope as it faces $1.5 billion due in 2025 and $4.7 billion due in 2026, and notes that shares could remain volatile as weakness in carrier spending continues into the first half of 2024.
Leopold notes that CommScope can remedy that a bit by selling assets, but argues that "exiting a good business will not help the long-term."
But he doesn't expect operator spending to be depressed indefinitely, noting that the gradual ramp up of government programs such as the $42.45 billion Broadband Equity Access and Deployment (BEAD) program are poised to "provide an offset" for CommScope.
Revenue at CommScope's ANS unit is likely to remain depressed through the first half of 2024 as sales focus on the company's legacy products. But improvements, driven by sales of new amplifiers, are expected to surface in the second half of the year, Leopold predicted.
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