One of Wall Street's biggest winners of the day is Shenandoah Telecommunications Co, a telecom services company whose shares have climbed 4.3% to a price of $20.94 — 13.19% above its average analyst target price of $18.5.
The average analyst rating for the stock is hold. SHEN may have outstripped the S&P 500 index by 2.9% so far today, but it has lagged behind the index by 2.9% over the last year, returning -10.9%.
Shenandoah Telecommunications Company, together with its subsidiaries, provides a range of broadband communication services and cell tower colocation space in the Mid-Atlantic portion of the United States. The company is included within the communication services sector, which generally includes cyclical companies whose share prices rise and fall along with macro economic cycles. One exception are telecommunications providers, which are more akin to utilities in that demand for their services remain somewhat consistent regardless of the state of the economy.
Shenandoah Telecommunications Co has a trailing 12 month P/E of 232.7. Unlike its trailing EPS of $0.09, the company's forward EPS is negative at $-0.09 so they do not publish a forward P/E ratio. Calculating it ourselves, we see that SHEN has a forward P/E ratio of -232.7.
As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US communication services companies is 18.65, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Shenandoah Telecommunications Co's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -5.88. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing SHEN's growth potential .
To better understand the strength of Shenandoah Telecommunications Co's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
SHEN's average gross profit margins over the last four years are 58.9%, which indicate it has a potential competitive advantage in its market. These margins have slightly increased over the last four years, with an average growth rate of 0.1%. Shenandoah Telecommunications Co's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ MM) | Capital expenditures ($ MM) | Free Cash Flow ($ MM) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | -251 | -160 | -411 | -325.33 |
| 2020-12-31 | 303 | -120 | 182 | 76.06 |
| 2019-12-31 | 259 | -156 | 104 | n/a |
- Average free cash flow: $-41,669,000.00
- Average free cash flown growth rate: -124.6 %
- Coefficient of variability (lower numbers indicating more stability): 773.5 %
The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. A negative cash flow is common, even among successful companies. But if SHEN's free cash flow continues on its negative trend, it may not be able to sustain its dividend payments, which over the last 12 months has yielded 0.3% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Shenandoah Telecommunications Co has a P/B ratio of 1.6. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Communication Services sector, which stood at 2.62 as of the third quarter of 2022.
With an inflated P/E ratio, a lower P/B ratio than its sector average, and an unconvincing cash flow history with a downwards trend, we can conclude that Shenandoah Telecommunications Co is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a positive growth rate, and an inflated PEG ratio.
