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As you can see below, CommScope Holding Co. (COMM) made a big move up the Barchart Top 100 Stocks to Buy on Monday, jumping 66 spots to 12th position with a weighted Alpha of 242.08, 35% higher than its 52-week gain of 178.93%.
Typically, when a stock's weighted Alpha is higher than the 52-week percentage change, it's a sign that recent gains have been higher than those earlier in the year, suggesting it has plenty of momentum left in the tank.
Just because the weighted Alpha exceeds the 52-week gain doesn't guarantee momentum will continue, but aggressive investors might want to consider COMM stock. Here’s why.
COMM Stock’s History Suggests a Bottom Is In
I'll be honest, I know virtually nothing about Commscope. However, even though I'm not a technical analyst, its chart over the past five years and since its IPO in October 2013 ($15) strongly suggests that its shares have bottomed.
When I looked at its closing prices for the last year and saw that it hit an all-time low of 86 cents on May 1, I immediately thought a “reverse split” was in the cards. So, too, did the investors commenting on Layoff.com.
On April 18, someone with the handle Bubs said, “Just voted on the CommScope Holding Company proposals for the shareholder meeting. I encourage all to do so!”
It seems to have battled back, up 705% in the six months since the all-time low.
What’s Up With That?
A little history would help.
The North Carolina company dates back to 1961 when it was a division of Superior Continental Cable. It sold CATV systems and a coaxial cable called CommScope. The parent company was acquired by the Continental Telephone Co. in 1967. Nine years later, the division became an independent company.
Several moves later, CommScope was acquired by The Carlyle Group (CG) in 2011. CommScope was taken public in 2013 as I mentioned earlier. In April 2019, it acquired Arris International, the maker of set-top cable boxes and modems, for $7.4 billion, including the assumption of debt.
That appears to be part of where CommScope’s troubles began.
According to S&P Global Market Intelligence, CommScope's total debt was $2.51 billion in 2013, the year it went public. In 2015, it jumped up to $5.24 billion due to the $3.0 billion acquisition of TE Connectivity’s (TEL) Broadband Network Solutions business, which provided fiber optic and copper connectivity for wireline and wireless networks and small-cell distributed antenna system (DAS) solutions for the wireless market.
In 2019, after acquiring Arris, its total debt reached $10.07 billion. It’s come down by about $600 million in the five years since. Unsurprisingly, its Altman Z-Score--which predicts the likelihood of bankruptcy proceedings in the next 24 months--is -0.27, suggesting there is a possibility.
Its current total debt is 9.2x its EBITDA (earnings before interest, taxes, depreciation and amortization). In 2013, the multiple was 3.7x, considerably less. In the latest 12 months through June 30, it paid out $677 million in interest, more than 3x of what it paid out in 2013.
Its financial situation is poor, so it traded below $1 in April.
Why the 705% Move?
The company reported Q2 2024 results in early August that beat analyst expectations on the top and bottom lines. Revenue was $1.39 billion, $180 million higher than the Wall Street estimate. On the bottom line, it earned 34 cents, while the analysts expected a three-cent loss.
In an arguably frothy market, any stock that delivers better-than-expected earnings, especially one left for dead like CommScape, will see a massive jump as the speculators and meme-stock investors join the party.
While its core net sales were down 17% in the second quarter compared to Q2 2023, its adjusted EBITDA increased 19.5% to $302.1 million, while its adjusted earnings per share doubled from 17 cents to 34 cents.
The Connectivity and Cable Solutions (CCS) business drives Commscope's future.
“We are pleased with our CCS performance as datacenter and GenAI was a strong driver of growth. We are well positioned to take advantage of what we believe to be a multi-year growth cycle in this business,” stated CEO Chuck Treadway in the Q2 2024 press release.
This part of its business accounted for 57% of its adjusted EBITDA in the second quarter. As a result, it expects 2024 full-year adjusted EBITDA of $750 million at the midpoint of its guidance.
The Bottom Line on CommScope Stock
In July, the company agreed to sell its OWN (Outdoor Wireless Networks) and DAS (Distributed Antenna Systems) businesses for $2.1 billion. The deal should close by June 2025, with $1.27 billion in debt due. That sale helps reduce its total debt.
Excluding the divisions to be sold, its adjusted EBITDA in 2023 was $725 million. As I said, it expects $750 million In the second quarter, a small gain of 3-4% over 2023, but an increase nonetheless.
Given the two points above, the 705% jump seems justified. However, the next 705% ($47.59%) isn’t going to be nearly as easy. It has never traded that high, although it came close in 2017.
If you’re an aggressive investor, I like this call option expiring in 80 days.
I like the Jan. 17/2025 $10 call for three reasons: 1) You’re only putting up 5.5% of your own money for the right to buy 100 shares, 2) You can double your money by selling before it expires if it appreciates by $1.75 (25.8%), and 3) There’s enough time to recover should its earnings report on Nov. 7 deliver bad news.
I wouldn’t touch it with a 10-foot pole if you’re risk-averse,
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
