Margin Headwinds At Commscope Make Near-Term Earnings Beats Unlikely, Morgan Stanley Says In Downgrade

Despite positives such as better North American service provider spending and longer-term upside arising from technology transitions, Morgan Stanley prefers to stay on the sidelines of the telecom stock Commscope Holding Company Inc (NASDAQ: COMM).

The Analyst

Analyst Meta Marshall downgraded Commscope from Overweight to Equal-weight and maintained a $41 price target. 

The Thesis

Commscope is a a play on FirstNet, Marshall said in a Monday note. FirstNet is an independent authority within the Commerce Department that builds and operates broadband networks nationwide for public safety.

Commscope also has opportunities in 5G, fiber-to-the-premises and hyperscale data center investment cycles, the analyst said. 

With the stock moving closer to Morgan Stanley's price target, Marshall said elevated EPS expectations are difficult to achieve on top-line beats alone.

Further upside would necessitate earnings beats throughout 2018 — a difficult feat in the first half of the year in the face of margin headwinds, the analyst said. 

Given conservative top-line estimates, an earnings beat will be easier in the second-half, when FirstNet is in full swing and stronger capex spending kicks in, Marshall said. 

Every $50 million of revenue upside contributes 4 cents to Commscope's EPS, the analyst said, adding that he only projects 15 cents of upside to EPS estimates if the company's margins return to 2016 levels. 

The Price Action

Commscope shares have gained 2.7 percent year-to-date.

The stock was down 1.65 percent at $38.22 at the close Monday. 

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