We maintain our Hold recommendation for Citizens Communications Co. (CZN), which provides telecommunications services primarily to rural and suburban customers. Although the company continues to exhibit growth in its broadband business, losses in voice access lines remains an area of concern. Another matter of concern is the decrease in funding by the Federal Universal Service Fund (subsidies for lower income and rural consumers).
The acquisition of Commonwealth Telephone Enterprises Inc. in 2007 provided CZN with further access to high margin rural markets and cash synergy of $40 million. The combined entity became the seventh largest local telephone exchange company in the U.S., having the necessary scale to protect their merged service markets. The Global Valley acquisition was completed on October 31, 2007. This acquisition is accretive to CZN's free cash flow and is expected to offer opportunities for revenue growth and cost savings synergies.
CZN continues to focus on cost reduction through consolidation in billing systems and other initiatives. Furthermore, free cash flow levels support the company's share repurchase program and attractive dividend of $1.00 per share, which is at the high-end in the industry equating to approximately 60% of net income payout.
CZN is trading at 18.4x our estimated earnings for 2008 estimates, which represents a premium to both the S&P 500 and the forward P/E ratio for the industry average. On the basis of enterprise value (EV) to EBITDA, a more appropriate valuation metric for highly leveraged securities, CZN is trading at approximately 6.5x estimated 2008 EBITDA, which is above the industry average of 5.0.
While we recognize that the company's strong and stable cash flow and high dividend yield are attractive, we believe such a premium valuation is usually considered stretched, given the company's limited growth prospects. Our $12.00 target price, therefore, is based on a P/E multiple of 19.5x estimated EPS for 2008.
Anindya Barman contributed to the report.
Read the full analyst report on CZN
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