Cogent Communications Holdings Inc. (CCOI) is a facilities-based provider of low-cost, high-speed Internet access and private network services to bandwidth-intensive businesses. Adding it to the model portfolio will leave it well positioned in a market beset by concerns that are driving volatility higher, explains Bryan Perry, editor of Cash Machine.

Historically, a strong showing by the S&P 500 during the reporting season heals most market ills. But from time to time, dark clouds gather and overwhelm good news because fear strikes deep into the heart of investor sentiment. The rolling crisis in the regional bank sector is doing just that, stealing the thunder of an otherwise better-than-forecast first quarter earnings season.

With better than two-thirds of companies within the S&P 500 having posted their top- and bottom-line results, the numbers are impressive given the narrative of an impending “earnings apocalypse” coming into the reporting season. In terms of revenues, 63% of S&P 500 companies have beaten consensus analysts’ estimates, which is below the five-year average of 69%, but equal to the 10-year average of 63%.

Better yet, forward guidance has been remarkably upbeat. Again, about six of every 10 companies providing an outlook are cautiously optimistic, with some downright bullish on their future business conditions.

Cogent Communications Holdings (CCOI)
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CCOI is attractive in this environment. Cogent’s facilities-based, all-optical IP network provides services in 219 markets across 51 countries. The stock received a double upgrade at BofA to Buy after Cogent closed the purchase of the legacy Sprint wireline fiber network from T-Mobile, complementing its On Net connectivity.

That’s coming alongside an expected boost to free cash flow from its recent acquisition of Sprint Wireline and gets Cogent an entry into the high-capacity wavelength services market (and dozens of new enterprise customers), along with $700 million in cash from T-Mobile, BofA analyst David Barden noted. Barden expects Cogent management to “swiftly leverage its existing platform and salesforce to realize synergies and transition the acquired business from losses to profit.”

The combined business should eclipse current annual run-rate free cash flow of $50-$60 million, at greater than $150 million in 2024 and beyond, he said. Now, Barden is implementing a two-notch upgrade on the expected boost to free cash flow, as well as related accretion in earnings before interest, taxes, depreciation and amortization, along with the now-underrepresented new sales growth vectors.

Barden boosted Cogent’s price target to $85, implying 26% further upside from here. Revenue for 2023 is forecast to grow by 16.7% to $700 million and increase by 18.7% to $830 million in 2024.

Recommended Action: Buy CCOI under $70.

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