CommScope - Credit Suisse

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04 December 2013
Leveraged to a Wireless CapEx Upswing
Initiate at Outperform: We believe CommScope is well positioned to benefit from the improving wireless carrier spending environment as well as the rapid rollout of LTE. Given the company's solid positioning, scope for operating leverage, and balance sheet deleveraging, we believe the shares
will outperform, and we initiate with a target price of $20.
A Leader in an Improving Market: The wireless business (~62% of sales) is a market leader in the area of base station antennas, amplifiers, filters, cables, and physical layer equipment that go into a base station. We believe this is leveraged to an improving wireless infrastructure spending environment that is set to see a multi-year cyclical upturn, driven by a rapid period of LTE deployment. We see a healthy CapEx environment developing, with continued robust spending in Japan and North America, given strong data growth. Additionally, with Europe coming out of a recession, triggering Vodafone's intentions to spend, and recent auctions pushing up spending in
Brazil, CapEx spending could see even further upside.
®
analyses, we believe there is 20% upside potential to $20.
Share price performance
Price Indexed S&P 500 INDEX
On 12/02/13 the S&P 500 INDEX closed at 1808.37
Quarterly EPS Q1 Q2 Q3 Q4 2011A 0.26 0.23 0.25 0.10 2012A 0.15 0.30 0.43 0.32 2013E 0.35 0.60 0.38 0.28
Financial and valuation metrics
Year 12/11A 12/12A 12/13E 12/14E EPS - (Excl. ESO) (US$) 0.84 1.20 1.59 1.66 EPS (CS adj.) (US$) 0.84 1.20 1.61 1.66 Prev. EPS (CS adj.) (US$) — — — — P/E (CS adj., x) 19.8 14.0 10.4 10.1 P/E rel. (CS adj., %) — 80.9 63.5 68.2 Revenue (US$ m) 3,275.5 3,321.9 3,453.6 3,532.9 EBITDA (US$ m) 462.6 570.6 669.7 683.5 Net debt (US$ m) 2,246 2,206 2,199 1,900 OCFPS (US$) 0.85 1.85 1.41 1.82 P/OCF (x) — — 11.8 9.2
Number of shares (m) 185.70 Price/sales(x) 0.79 BV/share (Next Qtr., US$) — P/BVPS (x) 37.3 Net debt (Next Qtr., US$ m) 2,199.3 Dividend (current, US$) — Dividend yield (%) —
Source: Company data, Credit Suisse estimates.
Rating OUTPERFORM* Price (02 Dec 13, US$) 16.74 Target price (US$) 20.00¹ 52-week price range 16.74 - 14.85 Market cap. (US$ m) 3,108.68
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
[V] = Stock considered volatile (see Disclosure Appendix).
Research Analysts
Kulbinder Garcha
04 December 2013
CommScope (COMM) 2
Executive Summary We initiate coverage of CommScope with an Outperform rating and a target price of $20.
We believe that the company is directly leveraged to the improving wireless spending
environment over the next few years. This is driven by a growth in smartphones, tablets,
and M2M communication devices; datacenter and cloud based services; and LTE rollouts.
Our Outperform rating is based on five key factors.
Solid Supplier of All Players in the Wireless Infrastructure End Markets:
CommScope's wireless segment provides antennas, amplifiers, filters, cables and physical
layer equipment for base stations, as well as microwave antennas and enclosures for base
stations for wireless infrastructure. This enables wireless operators to deploy macro cell
sites and small cell DAS solutions to meet 2G, 3G, and 4G cellular coverage and capacity
requirements. The company provides everything that makes the base station work outside
of the cellular technology that Ericsson, NSN, Huawei and Alcatel-Lucent typically supply.
While market share is hard to track, we estimate that the company is a leading player and
has the number one share for RF wireless network connectivity solutions.
An Improving End Market: Specifically for the wireless infrastructure market, we see
potential for a multi-year upturn in spending, driven by a confluence of factors.
Region by Region the Spending Outlook Is Improving: Looking at indications from carriers,
we believe that wireless CapEx spend may only grow about 2% next year, with potential
upside for 2014 guidance. We see continued strength in CapEx spend at U.S. and
Japanese carriers, an expected pick-up in spending in Korea following the recent
spectrum auction, and LTE deployments beginning in Brazil. Within Western Europe, we
see Vodafone's Project Spring potentially reaccelerating the market, especially in the
context of the sizeable underinvestment in recent years. Vodafone aims to spend an
incremental £6bn over the next three years, with 65-75% of the investment dedicated
toward improving network quality. This has the potential to drive further CapEx upgrades
from other major operators in Europe, similar to what occurred in the U.S. starting in late
2011.
LTE Coverage Specifically Is Picking Up: Today, we estimate that GSM coverage is over
85%, with WCDMA at about 55% of the population and LTE at about 10%. Given the rising
level of smartphone, tablet, and connected device growth, as well as the increasing
amount of traffic per device, we believe the acceleration of LTE coverage could be far
more rapid than the rollout of WCDMA. This accelerated rollout is further driven by greater
device availability than when WCDMA was initially deployed.
Exhibit 1: CommScope Summary P&L—FY13E/FY14E EPS of $1.61/$1.66 in millions, unless otherwise stated.
2011 2012 2013E 2014E
Y/Y % change 37.5% 1.4% 4.0% 2.3%
Gross Profit 830.4 1,060.7 1,193.9 1,221.4
Gross Margin 25.4% 31.9% 34.6% 34.6%
Operating Income 379.9 501.1 614.1 629.3
Operating Margin 11.6% 15.1% 17.8% 17.8%
Net Income 130.7 185.3 258.8 303.4
Diluted Share Count 155 155 163 183
Non-GAAP EPS 0.84 1.20 1.61 1.66
04 December 2013
CommScope (COMM) 3
Scope for Continued Leverage on Margins: CommScope has seen EBITDA margins
expand from 14% to 19% over the past three years. Going forward, while we currently
estimate margins of ~20%, we believe that there may be upside to this level due to an
ongoing focus on costs and an efficient supply chain.
CommScope's integrated solutions for wireless, enterprise, and broadband networks are
differentiated in the marketplace and provide a competitive advantage. The company has
invested more than $100 million in R&D in each of the last five years. It has also added IP
and innovation through acquisitions, such as Argus, which enhanced next-generation base
station antenna technology. The ongoing innovation, supported by proprietary IP, has
allowed the company to sustain this competitive advantage.
De-leveraging the Balance Sheet: We estimate that the company can generate over
$300 million of FCF per annum. This is one mechanism by which CommScope will be able
to reduce its leverage. Per the company's guidance, we forecast substantial debt
payments of over $800 million this year (using IPO proceeds) and a further $270 million
and $300 million in 2014 and 2015. Additionally we see scope for improved earnings
growth through the refinancing of its debt, given it currently has $1.5 bn of debt maturing in
2019 which has a coupon of 8.25%. As the company's capital structure improves, there
may be scope for cash distribution in the future.
Exhibit 2: CommScope Will Be Decreasing Its Leverage Following Its IPO US$ in millions, unless otherwise stated.
2,715
Le ve
ra ge
R at
Valuation at a Discount to Component Peers: We consider comparable companies for
CommScope, as those with similar attributes to its business (i.e., Amphenol, Anixter, etc.).
We believe that, when compared with these companies, there are two aspects that make
the valuation look appealing. First, the company is relatively speaking much higher in
terms of profitability. We note it has EBITDA margins at ~20%, whereas component peers
average about 12%. Second, on any financial metric, we see the company is trading at a
discount (34% on P/E, 21% EV/EBITDA – Amphenol 13x, Anixter 9x, Comba Telecom 9x-
and 50% on P/FCF on average) across the component companies peer group.(See
Exhibit 27.)
04 December 2013
CommScope (COMM) 4
Wireless—Improving End Market CommScope's core business is wireless, which is 62% of sales and 69% of profit. Our
extensive analysis of the business leads us to conclude that this business segment is set
to see an improving end market, and in turn should drive moderate leverage. Looking
ahead to FY13/14, we expect revenues of $2.1bn/$2.2bn, growth of 12%/2%, with
operating margins of 19.8%/18.8%, respectively, based upon several factors.
Solid Supplier of All Players in the Wireless Infrastructure End Markets: The wireless
segment for CommScope provides base station antennas, amplifiers, filters, cables and
physical layer equipment for base stations, as well microwave antennas and enclosures
for base stations for wireless infrastructure. This enables wireless operators to deploy both
macro cell sites and small cell DAS solutions to meet 2G, 3G, and 4G cellular coverage
and capacity requirements. In essence, the company provides everything that makes the
actual base station work outside of the cellular technology that Ericsson, NSN, Huawei
and Alcatel-Lucent may supply. While market share is hard to track, we estimate that the
company is a leading player and has the number one share for RF wireless network
connectivity solutions.
Exhibit 3: Wireless segment P&L—OMs Expected to Stay Stable at ~19% LT US$ in millions, unless otherwise stated.
1Q13 2Q13 3Q13 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 2012 2013 2014 2015
Wireless Sales 496 591 553 502 506 597 561 518 1,917 2,143 2,181 2,290
QoQ Growth % -3.8% 19.1% -6.6% -9.1% 0.8% 17.9% -6.1% -7.7%
YoY Growth % 23.4% 27.7% 3.2% -2.7% 1.9% 0.9% 1.4% 3.1% 5.0% 11.8% 1.8% 5.0%
Wireless sales as % of group 61.7% 62.9% 62.2% 61.2% 61.7% 63.0% 61.6% 60.5% 57.7% 62.0% 61.7% 61.7%
Adj. Operating Income 95 127 116 88 88 120 109 93 269 425 411 427
Adj. Operating margin % 19.0% 21.4% 21.0% 17.4% 17.4% 20.1% 19.5% 18.0% 14.0% 19.8% 18.8% 18.6%
Wireless Op. Inc as % of group 71% 85% 79% 59% 60% 80% 74% 63% 35% 49% 47% 47%
An Improving End Market in Spending Terms: Looking at indications from carriers,
while wireless CapEx spend may only grow about 2% next year, we believe there may be
scope to the upside to 2014 guidance. We see this as driven by a number of factors,
including:
Accelerating LTE deployments, given population coverage is only 10%, with adoption
we believe being rapid;
Carrier competition, as we see carriers such as Sprint keeping the pressure on North
American spend, and Vodafone's investments could change the dynamic in Europe;
and
Need for improvements in network quality, given surging data growth.
LTE an Opportunity to Add Value: We note that the continued strain on LTE networks,
as rapid growth of data usage is outpacing infrastructure support in major cities, will
continue to drive demand for network upgrades and additional capacity and coverage
projects. Within this, while CommScope is leveraged to growth across 2G, 3G, and 4G
given its global presence, LTE is a specific area in which we believe CommScope tends to
outperform.
Outgrowing the End Market: We believe this business should grow around 2% in 2014
to $2.2bn and ~6% per year through cycle to about $2.3bn by 2015, as the segment is a
leveraged play on the wireless infrastructure market. CommScope supplies to all the
vendors in the market so it makes them, in aggregate, exposed to a service provider
04 December 2013
CommScope (COMM) 5
spending recovering. Furthermore, the space is now much more consolidated in terms of
vendors than it was ten years ago, effectively reducing the level of competition in the
space.
Customers
Antenna Solutions: CommScope's solutions, marketed primarily under the Andrew
brand, enable wireless operators to deploy both macro cell sites and small cell DAS
solutions to meet 2G, 3G, and 4G cellular coverage and capacity requirements.
Macro Cell Site Solutions: These can be found at wireless tower sites and on rooftops
and include base station antennas, microwave antennas, hybrid fiber-feeder and power
cables, coaxial cables, connectors, amplifiers, filters, and backup power solutions
including fuel cells.
antenna systems that allow wireless operators to increase spectral efficiency. This extends
and enhances cellular coverage and capacity in challenging network conditions such as
commercial buildings, urban areas, stadiums, and transportation systems.
Established Key Customer Relationships: CommScope serves a diverse set of
customers in over 100 countries including all major carriers, infrastructure providers, and
distributors. The company is relevant to the entire wireless infrastructure ecosystem in that
it is approved by all the key infrastructure vendors and supplies to all the key carriers.
Customers include Anixter, Ooredoo, Verizon, Ericsson, Alcatel Lucent, Comcast,
T-Mobile, Huawei, China Mobile, China Unicom, China Telecom, and Softbank. While the
company may be less leveraged to growth in China in the future, we believe the overall
trends in terms of CapEx and LTE deployments may mean there is potential to the upside.
0 4 D
RF Engineering
across various generations of wireless technologies
Continued focus on engineering and innovation has created high quality products and robust pipeline of new
products and innovations
Complete connectivity solutions supporting 2G, 3G and 4G wireless technologies for both macro cell sites
and Small Cell DAS
Integrated Small Cell DAS solutions that are multi-operator and multi-band
Comprehensive
Filter and Amplifiers
Metro Cell Solutions
04 December 2013
CommScope (COMM) 7
Key Drivers—An Inflecting End Market
Demand for Wireless segment products depends primarily on capital spending by wireless
operators to expand their distribution networks or to increase the capacity of their
networks. We believe the following four drivers will continue to provide tailwinds for the
Wireless segment.
Wireless Infrastructure: Ericsson, 4-6% Growth Expected in Core, Radio, and IP
Segments: Ericsson expects the total network equipment market (~50% of Ericsson's
group sales) to grow at a CAGR of 3-5% in 2012-16 (CAGR of 4-6% in key segments like
Radio, IP & Transport, Core) and 5-7% for Services (~45% of group sales). Given
Ericsson is likely to benefit from its installed base of hardware, we expect its 2014/15
Networks sales to grow at 2%/2% yoy, along with 5%/6% yoy growth, respectively, in its
Global Services top-line, driving revenue growth of 4% yoy at the group level over the
period.
LTE Rollout Is the Fastest Ever: In its annual Mobility Report (June 2013), Ericsson
noted that LTE has been deployed at a significantly faster pace than its predecessors
GSM/EDGE and WCDMA/HSPA. Despite being in the relatively early stages of rollout, by
year-end 2012, LTE was estimated to cover 105 of the global population, and looking
ahead six years, it is predicted that LTE will cover approximately 60% of the population
from 10% today. Consistent with this, we see multiple rollouts happening across all major
regions for LTE beginning in 2013 and beyond. (See Exhibit 5.)
Exhibit 5: LTE Coverage Expected to Expand to 60% in the Long Term
>85%
>55%
~10%
Source: Company data.
Specifically beyond the current rollouts, we also believe adoption may be rapid. For
example, LTE has been launched on 6 continents, by 156 operators active in 67 countries;
according to Qualcomm, there are 474 carriers investing in LTE technology at present.
Deployment has been facilitated by the ability to re-farm spectrum and the utilization of
multi-standard radio solutions. Re-farming enables an operator quickly to make new
spectrum available for LTE, without the need to acquire new bandwidth. To this point, at
the recent Alcatel Lucent Technology Symposium, it was noted that presently already over
70 devices exist with LTE capability, much higher than the number of 3G devices at a
similar point in time.
Driving CommScope's Wireless Business: We believe that specifically the rising
complexity of networks, given the improving spending environment, is an additional driver
for the end market for CommScope for products in its RF, antenna, and macro site
solutions business. The complexity will occur simultaneously with the increasing rollout of
04 December 2013
CommScope (COMM) 8
LTE over the next five years of LTE. While we note that North American wireless operators
have made large LTE investments in building more coverage in 2013, this does not
necessarily apply globally. Many wireless operators in Europe, Asia, and Latin America
are expected to commence their substantial LTE investment cycle in 2014 and beyond.
Investments are expected to continue through 2014, followed by increasing coverage by
smaller North American carriers and subsequent further spending by all North American
wireless operators. As wireless operators deploy LTE or other 4G technologies, they must
manage increasingly complex networks.
Small Cells to Allow for Ubiquitous Wireless Coverage: Adding new macro cells has
been the traditional way to increase mobile capacity and will continue as the solution of
choice in many areas; however, in certain high-density locations, macro cells are close to
their interference limits and either need to be sectored or augmented by cells closer to the
ground. Small cell DAS solutions address these challenges encountered in dense urban
areas and complement existing macro cell sites by cost-effectively extending coverage
and increasing capacity. Wireless operators view in-building coverage as a critical
component of their network deployment strategies. Key challenges for wireless operators
in providing in-building cellular coverage are signal loss while penetrating building
structures and interference created by mobile devices while connected to macro cell sites
from inside a building. In-building DAS solutions bring the antenna significantly closer to
the user, which results in better coverage and reduced interference. Additionally,
in-building DAS provides field-proven, seamless signal handover for a user between
indoor and outdoor zones that can support multi-operator, multi-frequency and
multi-protocol (2G, 3G, and 4G) applications, making it the most effective small cell
solution. The benefits of small cell DAS have become increasingly important, with the
trend toward BYOD (bring your own device) in the enterprise market.
Operator Focus on Spectrum Efficiency: Small cell DAS solutions also address outdoor
capacity issues in urban areas. At peak usage, 50% of mobile data are carried by only
15% of the macro cell sites, creating significant stress on mobile network capacity. This
urban network capacity issue can be solved by deploying small cell DAS solutions to
create small coverage areas that enable re-use of spectrum. Re-use of spectrum allows
wireless operators to optimize capacity of existing licensed spectrum by significantly
increasing repeated usage of the same frequencies within a defined coverage area.
Wireless CapEx Inflecting Upward
Improving CapEx Trends to Drive Growth and Leverage: Continued strength in CapEx
spend at U.S. and Japan carriers, an expected pick-up in spending in Korea (after a pause
in 1H13) following the recent spectrum auction, and LTE deployments beginning to
happen in Brazil will likely drive an improving CapEx environment for CommScope.
Vodafone recently increased its CapEx by around 30% through Project Spring, and we
believe that this has the potential to drive further CapEx upgrades from other major
operators in Europe, similar to what we saw in the U.S. beginning from late 2011. With
Project Spring, Vodafone aims to invest an incremental £6bn over the next three years,
with 65-75% of spend dedicated toward improving network quality,
We expect wireless CapEx in 2013/2014 to grow 6%/2% (with 2013 growth being driven
by aggressive CapEx budgets at carriers in U.S. and China), with wireless equipment
spend globally to be flat in 2013 followed by 5% growth in 2014. We believe that the U.S.
market continues to remain strong in terms of CapEx spending, along with early signs of a
pick-up in CapEx activity in Europe.
U.S. to Continue to See High Levels of CapEx Activity
Carriers in the U.S. have significantly increased their CapEx investment in 2012-14 on
wireless networks.
Wireless CapEx in the U.S. to Grow Nearly 15% in 2013, Guidance Suggests Flat in
2014: What is worth noting is that wireless CapEx in the U.S. has seen strong growth over
04 December 2013
CommScope (COMM) 9
the last few years. In fact, based on our estimates, we believe that wireless CapEx is likely
to have grown from $20bn in 2009 to around $33bn in 2013 (CAGR of 15%), driven by
carriers improving the quality of their networks in order to drive differentiation, which
includes the rollout of 4G/LTE networks. Looking at guidance from carriers, while we
believe that wireless CapEx spend may remain flat in 2014, we would equally note that it is
already running at a high level of slightly over $34bn per annum. In addition, we believe
there may be upside to 2014 guidance as carriers continue to look for ways to differentiate
by improving the quality of their 4G networks.
Exhibit 6: Wireless CapEx in the U.S. Likely to Grow to $34bn in 2013 and Then Remain at Those Levels for 2014
in US$ millions, unless otherwise stated.
Wireless CapEx (US$ mn) Q112 Q212 Q312 Q412 Q113 Q213 2009 2010 2011 2012 2013E 2014E
Verizon 1,885 2,048 2,133 2,791 1,992 2,278 7,152 8,438 8,973 8,857 9,646 9,982
AT&T 2,324 2,345 2,709 3,417 2,296 3,033 6,066 9,171 9,794 10,795 11,335 11,639
Sprint 710 1,012 1,376 1,786 1,706 1,728 1,161 1,444 2,416 4,884 7,419 7,405
T-Mobile US 747 539 717 898 1,231 1,111 3,687 2,819 2,729 2,901 4,343 4,019
Leap 146 119 106 63 26 23 680 399 442 434 165 200
MetroPCS 144 182 262 258 832 790 890 846
Total (US$ mn) 5,956 6,245 7,303 9,212 7,251 8,173 19,578 23,061 25,243 28,717 32,908 33,245
% change yoy -3% -8% 21% 46% 22% 31% 0% 18% 9% 14% 15% 1%
Wireless CapEx to Sales Ratio Also Rising by Around 4pp in the Last Three Years:
One of the factors that has helped this continued increase in CapEx investment across all
U.S. carriers has been the consistent level of growth in the services revenue. In fact, we
note that the cumulative wireless services revenue for the top four carriers in the U.S.
(Verizon, AT&T, Sprint, and T-Mobile US) has grown around 5% per year over the last
three years. Seeing their services revenue rise, carriers have continued to focus on
creating differentiation, such as network quality. As such, despite growth in services
revenue, CapEx to services revenues for wireless operations for the top four carriers in the
U.S. has risen from 14% in 2010 to over 18% in 1H13.
Exhibit 7: U.S. Wireless Services Revenue Growing at 5% pa Exhibit 8: Wireless CapEx to Service Revenue Rising in U.S.
-10%
-5%
0%
5%
10%
15%
20%
25%
W ir
e le
s s
1 3 .3
e le
s s
Source: Company data, Credit Suisse research. Source: Company data, Credit Suisse research.
Entry of Softbank in the U.S. Market Also Led to CapEx Hikes Across the Board:
Apart from the rollout of LTE networks, another driver for CapEx hikes in the U.S. has
been the merger of Sprint and Softbank. Sprint had plans to increase its CapEx from $3bn
in 2011 to around $6bn in 2012 to deal with its network modernization plans and rollout
LTE networks. Additionally, the entry of Softbank in the U.S. market resulted in further
04 December 2013
CommScope (COMM) 10
CapEx intensity among carriers in an attempt to build a better quality network to drive
differentiation. Specifically, we would note the following at each of the top four operators in
the region.
Sprint and Softbank have noted that they plan to spend $8bn per year over
2013/2014 in order to rollout LTE, up from $5.4bn it spent in 2012 on CapEx.
AT&T had increased its CapEx from $20bn in 2012 to $21bn in 2013. (Initially, it had
increased its CapEx guidance for 2013 to $22bn in Nov 2012 but subsequently
lowered it to $21bn in the next few months, as it was on track for LTE rollouts.) This
would imply 6% yoy growth in total CapEx, but within this, we believe that wireless
CapEx may be up 18% yoy (already up 27% yoy in 1H13), as the company continues
to invest more on its wireless network as opposed to wireline.
Verizon was initially planning to keep its CapEx flat at $16.2bn for 2013, but it recently
noted plans to increase it slightly from $16.4bn to $16.6bn (up 2% yoy at the mid-point
of the range). More specifically, we would note that wireless CapEx within this is likely
to grow close to 10% yoy (already up 9% yoy in 1H13), as the carrier continues to
migrate higher proportion of group CapEx to its wireless operations.
We note that, even though Verizon has guided to flat CapEx, recent comments by the
company CFO Fran Shammo indicate that this could be biased upward, given
customers are seeing lower data speeds in a number of large cities.
"There are certain pockets where we're absolutely going to experience that down tick
from the LTE network down to 3G because of capacity constraints…the three major
cities that are where we're seeing some of these pressures, which [are] New York,
San Francisco, Chicago." (Fran Shammo, November 12, 2013)
T-Mobile USA and Metro PCS have also embarked upon an aggressive network
strategy since their merger announcement in late 2012. Although they initially were
planning to invest $4.7bn to $4.8bn on CapEx in 2013 (up from combined $3.7bn in
2012), they have recently lowered it to $4.2bn to $4.4bn. However, our EU telecoms
research team (Justin Funnell) believes that the combined entity will likely maintain
CapEx levels of $4.1bn for 2014.
Europe Weak CapEx Trends So Far—Vodafone a Trigger for Change
One of the key reasons for CapEx weakness has been the vicious circle of lack of revenue
growth, declining EBITDA margins, and weak cash flows, thereby resulting in weak CapEx
trends.
Vodafone Now Looking for £7bn of Incremental Investment by March 2016: Vodafone
has been maintaining flat CapEx spending for its European operations, similar to its group
level trend in the last two to three years. However, in its FY13 (ending March 2013), it is
worth noting that, although group CapEx was roughly flat, its CapEx spend in Europe
actually grew 7% yoy, mainly driven by investments in Germany and the UK. In addition,
the company launched a new program called Project Spring in September 2013, whereby
it was targeting an increased level of CapEx investment (£6bn over the next three years)
to drive network advantage over competition especially in Europe. On its first half FY13
results, the carrier raised the level of incremental CapEx to £7bn by March 2016.
Recently, Vodafone provided further details around its Project Spring program, whereby it
raised incremental CapEx investment from £6bn (announced in September 2013) to £7bn
by March 2016, with around £0.5bn being committed for the current fiscal year (ending
March 2014). In addition, the company also noted this incremental CapEx investment will
have slight weighting toward FY14/15, which points to some level of acceleration.
04 December 2013
CommScope (COMM) 11
Exhibit 9: Vodafone CapEx Spend in Europe Has Already Seen Some Pick Up in Early 2013
in GBP millions, unless otherwise stated; Vodafone financial year ending March.
Vodafone CapEx (£ mn) H1 10/11 H2 10/11 H1 11/12 H2 11/12 H1 12/13 H2 12/13 FY 09/10 FY 10/11 FY 11/12 FY 12/13
Vodafone Germany 342 482 410 470 445 628 766 824 880 1,073
% change yoy 3% 11% 20% -2% 9% 34% 8% 7% 22%
Vodafone UK 178 338 219 356 231 370 494 516 575 601
% change yoy 26% -4% 23% 5% 5% 4% 4% 11% 5%
Vodafone Italy 260 330 269 352 239 328 610 590 621 567
% change yoy -13% 6% 3% 7% -11% -7% -3% 5% -9%
Vodafone Spain 220 297 147 282 152 225 543 517 429 377
% change yoy 29% -20% -33% -5% 3% -20% -5% -17% -12%
Vodafone Other Europe 521 709 497 595 417 823 1,282 1,230 1,092 1,240
% change yoy 11% -13% -5% -16% -16% 38% -4% -11% 14%
Total Vodafone Europe 1,521 2,156 1,542 2,055 1,484 2,374 3,695 3,677 3,597 3,858
% change yoy 8% -6% 1% -5% -4% 16% 0% -2% 7%
Incremental CapEx Seems to Be Directed Toward Mobile Networks; Good For
Wireless Equipment Vendors, Especially Ericsson. Vodafone was earlier targeting
£6bn of incremental investment over the next three years, of which £2.7bn to £3.0bn of
CapEx was aimed at Mobile Networks. Under the revised plan, Vodafone is targeting £7bn
of incremental CapEx under Project Spring, of which £4.5bn is aimed at Mobile Networks
(£3.0bn for Europe and £1.5bn for AMAP). Given this incremental spend is being directed
at Mobile Networks, we would see this as a positive for wireless equipment vendors with
strong positioning in Europe, specifically Ericsson, and to a certain extent NSN as well.
Note this is in addition to £5bn of Mobile Network CapEx already planned by Vodafone for
Europe and £3bn for Mobile Networks in AMAP regions by March 2016.
Overall Vodafone Is Looking at Significant Build Plans by 2016: Combining
Vodafone's targets for both Europe and AMAP regions, we would note that the carrier is
looking for significant build plans for its mobile network over the next 2.5 years, with:
47,000 new 2G sites to deliver improved voice service (lower dropped call rate and
improved call set up success);
73,000 new 3G sites to offer better quality of 3G service (higher levels of coverage
and increased data speeds);
77,000 new 4G sites as part of LTE rollouts and expand outdoor coverage; and
70,000 new small cells or Wi-Fi sites.
04 December 2013
CommScope (COMM) 12
Exhibit 10: Can CapEx to Sales Ratio in Western Europe Rise Similar to the U.S.?
13.3% 12.4%
14.2% 14.8%
W ir
e le
s s -
u e (
US W Europe
Source: Company data, Credit Suisse research, EU telecoms research team (Justin Funnell).
CapEx to Sales Significantly Behind in W.E. When Compared to the U.S.: CapEx
trends within Europe has been lackluster over the last few years, with most carriers
looking to maintain flat investment levels. Furthermore, with service revenues having been
under pressure, the CapEx to sales ratio has seen slight improvement despite flat CapEx.
When comparing this to the U.S., what is striking is that service revenues have grown at
around 5% pa, but wireless CapEx has growing significantly faster, resulting in the CapEx
to sales ratio rising from nearly 12.5% in 2009 to slightly over 18% in 1H13. When
comparing this to W.E., we see that CapEx to sales ratio has only picked up from around
10% in 2009 to 12% in 1H13.
LATAM to Pick Up as LTE Networks Are Beginning to Get Deployed
Capex in the region saw weakness during 2012 after bulk of the 3G rollouts were done,
especially in Brazil. Now with LTE rollouts starting to take place from 1H13, we believe this
is likely to drive revenue growth for equipment vendors in the region.
LTE Deployments Starting to Happen Now: With deadlines in place for rollout of LTE
networks in Brazil, we believe all four operators in the country ( Vivo, Claro, TIM, and Oi)
are going to step up their efforts to deploy LTE networks across a number of cities over
the next 12-24 months. In fact, as per the coverage plans, it is expected that operators are
likely to extend LTE coverage to all cities with more than 500K population by May 2014.
(See Exhibit 11.)
Exhibit 11: 4G Coverage Plans in Brazil Suggest Significant Activity in the Next 12
Months
Apr 2013 All cities hosting the Confederations Cup 2013
Dec 2013 All cities hosting and co-hosting the World Cup 2014
May 2014 All capitals and cities having more than 500K inhabitants
Dec 2015 All cities having more than 200K inhabitants
Dec 2016 All cities having more than 100K inhabitants
Dec 2017 All cities having between 30K and 100K inhabitants
Source: Teleco Brazil, Credit Suisse research.
4G Population Coverage to Expand: Looking at 3G population coverage levels, we
would note that it has almost reached 90% levels in Brazil compared to around 65% in
2009. Now with LTE population coverage at around 20%, we believe that number is set to
rise significantly over the next 12-24 months looking at the coverage plans in the region.
04 December 2013
CommScope (COMM) 13
Also looking at the number of cities covered, we see that currently only 20 cities are
covered with LTE as opposed to around 3,400 cities with 3G coverage.
Exhibit 12: LTE Coverage Is Only Starting to Happen Now . . . Exhibit 13: . . .with Significant Pick-Up in Coverage to Come
Cities covered in Brazil
3G coverage 4G coverage
P o
p u
la ti
o n
c o
v e
ra g
Source: Teleco Brazil, Credit Suisse research. Source: Teleco Brazil, Credit Suisse research.
Outpacing the End Market?
We expect the wireless business to grow around 2% in 2014 to $2.2bn and ~5% per year
through cycle to about $2.3bn by 2015, as it is leveraged to the wireless infrastructure
market. As we discussed on our recent upgrade on Ericsson, this market is seeing a
cyclical and structural pick-up. CommScope supplies to all the vendors in the market so it
makes them, in aggregate, exposed to a service provider spend recovering.
Exhibit 14: CommScope Wireless Revenues vs. Mobile Infrastructure Industry Revenues
46,000
48,000
50,000
52,000
54,000
56,000
58,000
60,000
0
500
1,000
1,500
2,000
2,500
3,000
M o
b ile
In fr
as tr
u ct
u re
In d
u st
ry R
ev en
u e
It is worth noting that, while about ten years ago there were multiple RF and antenna
companies, now the industry is more consolidated. The key competitors in this space
currently are all largely outside the U.S. and include Comba Telecom Systems based in
Asia, KATHREIN-Werke KG, RFS (which is part of Alcatel-Lucent SA), and a to lesser
extent Ericsson and Huawei.
Enterprise: Dependent on the Cycle CommScope's Enterprise segment provides solutions for datacenters and commercial
buildings through voice, video, data, and bundled solutions that support a variety of
mission-critical applications that include storage area networks, backhaul, cloud
applications, and streaming media. Solutions for the datacenter also include datacenter
infrastructure management (DCIM) software as well as intelligent building solutions as
detailed in the following section. CommScope's Enterprise business constitutes ~25% of
sales. Looking ahead, we expect revenues of $834mn and $909mn in FY13 and FY14,
with operating margins of 19.7% and19.7%, respectively.
Exhibit 15: Enterprise segment P&L— revenue growth of 9% and 10% in FY14 and FY15 US$ in millions, unless otherwise stated.
1Q13 2Q13 3Q13 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 2012 2013 2014 2015
Enterprise Sales 192 219 212 211 201 233 238 237 847 834 909 1,000
QoQ Growth % -8.1% 14.0% -3.0% -0.6% -4.5% 15.8% 1.9% -0.4%
YoY Growth % -4.5% -2.8% 0.1% 1.1% 5.0% 6.7% 12.0% 12.2% -6.4% -1.5% 9.1% 10.0%
Enterprise sales as % of group 23.8% 23.2% 23.9% 25.7% 24.6% 24.6% 26.1% 27.7% 25.5% 24.1% 25.7% 27.0%
Enterprise Op. Inc as % of group 26% 31% 29% 28% 22% 31% 35% 33% 25% 19% 20% 21%
Infrastructure Solutions: CommScope's Enterprise solutions include optical fiber and
structured cable solutions, intelligent infrastructure software, network rack and cabinet
enclosures, intelligent building sensors, advanced LED lighting control systems, and
network design services. Within the solutions business, CommScope's key brands include
Systimax and Uniprise on the solution side and Redwood systems on the LED lighting
control/high density sensor solutions.
Datacenter Solutions: In addition to physical layer solution offerings, the company also
has DCIM software under the brand name iTRACS, which provides network intelligence
capabilities.
Key Drivers
Datacenter Spending Expected to Grow: As datacenters increase in size and number of
assets, so does the TCO and difficulty of managing datacenter infrastructure. DCIM
technology such as iTRACS helps improve the operational efficiency within a datacenter
while reducing costs in areas such as efficient power usage, utilization, applications, and
performance.
Transition to Smart Buildings: With the advent of BYOD across the enterprise space
and need for ubiquitous coverage and capacity, there is an increasing need for
infrastructure to support growing bandwidth requirements, in-building cellular coverage,
capacity, and monitoring software. In addition building automation, CommScope's systems
allow for enhanced energy efficient buildings.
04 December 2013
CommScope (COMM) 15
Broadband—Transition to Solutions Broadband constitutes about 15% of CommScope's overall revenues. CommScope's
Broadband solutions provide cable and communication products supporting multi-channel
video, voice and high-speed data services provided by cable companies (MSOs).
CommScope provides coaxial cable for HFC networks as well as fiber optic cable for North
American MSOs. This business is in gradual decline, as technology shifts from copper to
fiber optics. Looking ahead we expect revenues of $482mn/$443mn in FY13/FY14, with
operating margins of 5.1%/8.9%, respectively.
Exhibit 16: Broadband segment P&L – Declining Sales Although Margins Expected to Stabilize at ~11% US$ in millions, unless otherwise stated.
1Q13 2Q13 3Q13 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 2012 2013 2014 2015
Broadband Sales 118 133 125 107 112 117 112 101 564 482 443 420
QoQ Growth % -5.4% 12.4% -6.2% -14.2% 4.9% 4.3% -4.0% -9.7%
YoY Growth % -16.9% -10.9% -15.8% -14.3% -5.0% -11.9% -9.8% -5.2% -6.4% -14.4% -8.2% -5.3%
Broadband sales as % of group 14.7% 14.1% 14.0% 13.0% 13.7% 12.4% 12.3% 11.8% 17.0% 14.0% 12.5% 11.3%
Broadband Op. Inc as % of group 2% 7% 3% 4% 5% 8% 8% 5% 6% 3% 4% 5%
Key Drivers
Demand for Broadband products depends primarily on capital spending by cable television
system operators for maintaining, constructing, rebuilding, or upgrading their systems. We
believe the following themes will play a significant role in determining broadband demand.
Multi-Screen/Web-Based Video: A growing number of connected devices, continued
consumer demand for smartphones, and over-the-top services and streaming will create
ongoing demand for Broadband products.
Network Transition/Traffic: Further investment in IP networks, driven by deep fiber
solutions and a residential real estate recovery could be a potential catalyst for
CommScope products.
04 December 2013
CommScope (COMM) 16
Deleveraging Driving Net Income One of the benefits of the IPO from a financial model perspective is that CommScope will
likely be able significantly to deleverage itself in the longer term. With the IPO proceeds
and increasing levels of free cash flow each year, the company plans to reduce its net
leverage. We forecast the leverage ratio to decline from 3.9x in 2012 to 2.2x in 2015, with
net debt decreasing from $2.2 billion in 2012 to $1.6 billion in 2015. Additionally, we
estimate interest payments in 2015 will be down 25% from 2012, helping net income grow
at a CAGR of over 20% during this period.
Margins Risks to the Upside
Following the acquisition by Carlyle, the company has been reasonably successful in
transforming part of the business. Revenues have grown at a 10% CAGR from $2.3 billion
in 2010 to $3.5bn over the last 12 months. Looking ahead, we expect revenues to
continue to grow at a 4% CAGR to about $3.7bn by 2015. Additionally, adjusted operating
income has grown at a 29% CAGR from $284mn in 2010 to $603mn in the last 12 months.
We forecast this to continue to grow at a 10% CAGR to ~$670mn by 2015, with margins
expanding to 18.1%.
Exhibit 17: Revenue CAGR of ~4% Through 2015 Exhibit 18: OMs Should Continue to Be Stable ~18%
3,275
3,322
3,454
3,533
3,710
3,000
3,100
3,200
3,300
3,400
3,500
3,600
3,700
3,800
A d
j. O
p er
at in
g in
co m
A d
j. O
p er
at in
g m
ar gi
)
Adj. Operating income ($mn) Adj. Operating margin ($mn) Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Margin Improvement Initiatives
Bundled Solutions: One of the key factors driving overall margin improvement has been
selling bundled solutions to customers. For example, CommScope's RF cell site solution
enables wireless operators to reduce overall cost since they do not have to buy individual
components, which in turn improves the company's margin profile.
Portfolio Pruning: While private, the company further optimized its portfolio by exiting a
number of non-core businesses such as merchant RF subsystems and the geolocation
business.
Improved Channel Relationships and Distribution: The company also improved its
sales channel by expanding efforts into China and India. In addition, within Wireless, the
company has made significant headway with wireless operators with regard to providing
bundled solutions, as previously discussed.
R&D Investments: Since being taken private by Carlyle, the company has grown its R&D
investments significantly, particularly through initiatives such as Breakthrough Enabling
Technologies, which is a formalized program rapidly to accelerate new growth products to
commercialization.
04 December 2013
CommScope (COMM) 17
Acquisitions: The company also closed on a number of strategic acquisitions focused on
key growth initiatives within the business.
LiquidxStream Systems (June 2011): Broadens existing offering of broadband
solutions for the MSO market.
Argus (September 2011): Pairs CommScope's existing antenna offering with
Argus’ antenna research and technology expertise.
iTRACS (March 2013): Complements existing datacenter intelligence software
creating a broad DCIM platform.
Redwood Systems (July 2013): LED lighting controls capabilities to intelligent
building infrastructure solutions.
FCF Healthy, Deleveraging in the Near Term
With the IPO proceeds and increasing levels of free cash flow each year, the company
plans to reduce its net leverage. We forecast the leverage ratio to decline from 3.9x in
2012 to 2.2x in 2015, with net debt decreasing from $2.2 billion in 2012 to $1.6 billion in
2015.
Exhibit 19: Leverage Ratio Will Decline to 2.2x by 2015, with Net Debt under $2.0Bn in millions, unless otherwise stated.
FY 2012 FY 2013E FY 2014E FY 2015E
EBITDA 571 670 683 725
EBITDA Margins 17.2% 19.4% 19.3% 19.5%
Free Cash Flow 258 257 299 316
% Margin 7.8% 7.4% 8.5% 8.5%
% FCF Conversion NA NA 183.3% 148.3%
Gross Debt 2,471 2,399 2,128 1,830
Gross Cash 264 199 228 233
Net Debt 2,206 2,199 1,900 1,597
Leverage Ratio 3.9 3.3 2.8 2.2
Improving Free Cash Flow: Following its IPO, CommScope will likely benefit from
improving free cash flow each year, rising from $193 million in 2013 to an estimated $303
million in 2015. Free cash flow conversion will be well over 100%, at 183% and 148% in
2014 and 2015. This is partly a result of the company deleveraging and benefitting from
lower interest expense. Additionally, CommScope will see rising EBITDA from $570 million
to $725 million in 2015.
Improving Its Capital Structure: More specifically, the company plans to use the net IPO
proceeds to redeem long term debt. As shown in Exhibit 20 we assume declining debt
levels, from $2.5 billion in 2013 to $1.8 billion in 2015. Ultimately, CommScope plans to
reduce its net debt balance to $1.6 billion by 2015, which would imply a net leverage goal
of 2.2x in 2015 from an estimated ratio of 3.3x for 2013.
04 December 2013
CommScope (COMM) 18
Exhibit 20: CommScope Will Be Decreasing Its Leverage Following Its IPO US$ in millions, unless otherwise stated
2,715
Le ve
ra ge
R at
Increasing Free Cash Flow Means Reduced Leverage: We estimate that, in the long
term, the company can generate over $300 million of annual free cash flow. This is one
mechanism by which CommScope will be able to reduce its leverage. Per the company's
guidance, we forecast substantial debt payments of over $800 million this year (using IPO
proceeds) and a further $270 million and $300 million in the fourth quarters of 2014 and
2015. Additionally, the company has a history of issuing special dividends, returning a total
$750 million to shareholders throughout 2012 and 2013. As the company's capital
structure improves, there may be more scope for cash distribution in the future.
Exhibit 21: Increasing FCF Will Help Pay Down Debt US$ in millions, unless otherwise stated
Exhibit 22: Cumulative FCF to Grow to over $2bn US$ in millions, unless otherwise stated
0
50
100
150
200
250
300
350
400
450
500
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013E FY 2014E FY 2015E
Fr ee
C as
h F
lo w
0
500
1,000
1,500
2,000
2,500
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013E FY 2014E FY 2015E
C u
m u
la ti
ve F
re e
C as
h F
lo w
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Decreasing Leverage Gives EPS Upside. As a result of paying down debt, we forecast
CommScope's interest payments to decline 20% in 2014 and another 15% in 2015. We
believe that these reduced payments should positively impact EPS by $0.14 in 2014 and
$0.09 in 2015. With a more shareholder-friendly capital structure, CommScope will likely
have more flexibility to both grow earnings and distribute excess cash. As shown Exhibit
23, interest expense declining 9% from 2012 to 2015, would contribute to 20% pre-tax
income growth and 16% EPS growth over this period.
04 December 2013
CommScope (COMM) 19
Exhibit 23: Net Income Increasing by 23% Helped by a 9% Decline in Interest Payments US$ in millions, unless otherwise stated.
FY 2012 FY 2013E FY 2014E FY 2015E 2012-2015 CAGR
Operating Income 501 614 629 671 10.2%
D&A 262 259 251 247 -2.0%
Amortization 193 203 197 193 0.0%
Adj EBITDA 571 670 683 725 8.3%
Operating Income 501 614 629 671 10.2%
Other Income (15) (54) (6) (18) 5.2%
Interest Expense (189) (214) (171) (145) -8.5%
Interest Income 3 3 3 3 -6.4%
Other Adjustments 17 71 19 28
Pre Tax Income 317 421 475 539 19.3%
Income Tax Expense 132 162 172 191 13.2%
Net Income non-GAAP 185 259 303 347 23.3%
EPS 1.20 1.61 1.66 1.88 16.2%
Refinancing Long Term Debt Could Lead to an additional $15 million in savings.
Within its capital structure, CommScope currently has three different primary loans
outstanding. It has one senior, secured term loan due 2018, another subordinate loan due
2019, and a second subordinate note due 2020. In general the company will be
deleveraging, paying down over $800 million in debt this year and nearly $300 million in
2014 and 2015. In addition to this, though, management has highlighted that it may be
able to refinance its loan due 2019 that currently has an 8.3% interest rate in the first
quarter of 2015. As shown in Exhibit 24, per management commentary, it is possible that
by refinancing this loan to a lower interest rate from 8.3% to approximately 5.3%, the
company could save a further $15 million in interest payments in 2015, which would be a
benefit of 5 cents per share in EPS.
Exhibit 24: By refinancing its debt due in 2019, CommScope could save $15mn in 2015 in millions, unless otherwise stated
FY 2013E FY 2014E FY 2015E
Principal Amount Outstanding 2,399 2,128 1,830
Revolver - - -
Revolver 0 0 0
Other (0) 0 0
Interest Rates with refinancing
Revolver 3.00% 3.00% 3.00%
04 December 2013
CommScope (COMM) 20
The company Could Support Debt and Initiate Cash Distribution: As shown, we note
that, based upon our estimates, CommScope would exit 2015 with $233 million in cash
and $1.8 billion in debt. With EBITDA growing and declining leverage, the company may
benefit from better debt ratings. In the longer term, we believe that, given the 300 million of
FCF per year (shown in Exhibit 21), the company could also return cash to shareholders.
Management has outlined the following uses of cash in order of priority:
1) Reinvesting in the business
2) Strategic acquisitions
04 December 2013
CommScope (COMM) 21
Valuation—FV of $20 We focus our valuation on a three-pronged approach: (1) EV/EBITDA (comparing
EV/EBITDA multiples with peers), (2) discounted cash flow (DCF) analysis, and (3) Credit
Suisse HOLT ® analysis. Our approach suggests that the company’s equity value is
$3.1-3.3 billion, or $19.20-20.77 per share, with a blended value of $20.03 per share. Our
target price for CommScope is $20.
Exhibit 25: CommScope Blended Average Value of $20.03 in thousands, except per share data.
Approach Equity value (in $mn) Valuation Value/Share ($)
EV/EBITDA 3,054 8.4x EBITDA $19.20
DCF 3,199 Term. growth of 1%,
WACC of 9.2% $20.11
Credit Suisse HOLT 3,303 R&D life of 7 years $20.77
Blended Average 3,185 20.03
EV/EBITDA Multiple Suggests FV of $19.20 per Share
We Apply an EV/EBITDA Multiple of 8.4x on CommScope’s 2014 EBITDA Estimate:
CommScope is a slow growing, mature company, with an improving capital structure and
increasing free cash flow generation in the coming years. As such, we believe that an
EV/EBITDA valuation is an appropriate approach.
Exhibit 26: 8.4x our 2014 EBITDA Estimate Implies a Value of $19.20 per Share US$ in millions, unless otherwise stated.
CommScope CY14 EBITDA 683
Apply an 8.4x Multiple on CY14 EBITDA Estimate Based on Comps: To analyze a fair
earnings multiple for CommScope, we have looked at the current EV/EBITDA multiples for
the company along with the related peer group of component companies. Given
CommScope's superior margin profile to comparable component companies albeit slightly
lower sales growth, we believe the company can achieve a multiple of 8.4x, on our 2014
EBITDA estimate. This would still be a 17% discount to the component peers and a
premium of 12% to broader telecom equipment/infrastructure peers.
0 4 D
2 2
Exhibit 27: CommScope Is More Profitable Yet Trades at a Discount to component companies on an EV/EBITDA Valuation
Company P/E (x) EV/EBITDA Mkt cap/ FCF
2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E
Component Companies
Amphenol 25.0 22.9 20.7 15.0 14.0 12.9 24.8 19.8 22.7
Anixter 15.9 15.3 13.5 9.1 9.4 8.6 14.2 14.6 14.6
Comba Telecom NM 53.4 13.8 73.9 17.7 8.8 NM NM NM
Mean 20.4 30.5 16.0 32.7 13.7 10.1 19.5 17.2 18.6
Telecom equipment/ infrastructure
Motorola Solutions 20.6 13.9 15.9 18.7 9.2 8.6 18.1 28.3 19.5
Alcatel-Lucent NM NM NM NA 9.7 7.2 NM NM NM
Ericsson 19.7 15.4 13.3 12.1 8.2 7.2 NM 16.4 13.7
Finisar 31.5 18.0 13.3 15.8 8.2 7.1 NM 33.9 18.1
Mean 23.9 15.8 14.2 15.5 8.8 7.5 18.1 26.2 17.1
CommScope
CommScope 14.5 10.8 10.5 18.3 8.2 8.0 10.7 10.7 9.2
1) Superior Profitabil ity to component companies but trading at a discount. CommScope has superior gross, operating, and EBITDA margins compared to the
component companies in the peer group. However it trades at a 21% discount to this peer group on an EV/EBITDA basis for 2014. Even with slightly lower sales growth,
given its margin profile, we note that 8.4x is an appropriate multiple.
2) Small prem ium to telecom equipment peers with higher EBITDA margins. Compared to broader telecom equipment peers, CommScope has in-line gross margins but
higher operating and EBITDA margins. However, it does have slightly lower sales growth compared to these companies. With this superior profitability, we believe a small
premium is warranted.
…yet it trades at a discount to component companies on an EV/EBITDA valuation
CommScope is more profitable than its peers…
1
2
Company Mrkt Cap Net Debt EV Sales Growth Gross margin Operating Margin EBITDA Margin FCF Margin
2013E 2014E 2013E 2014E 2013E 2014E 2013 2014 2013E 2014E
Component Companies
Amphenol 13,706 586 14,292 5.7% 6.7% 32% 32% 20% 20% 22.6% 22.9% 15% 12%
Anixter 2,823 740 3,563 -0.8% 4.4% 23% 23% 6% 6% 6.1% 6.4% 3% 3%
Comba Telecom 4,075 501 4,576 -1.9% 13.9% 27% 29% 2% 6% 4.2% 7.4% 0% 2%
Mean 1.0% 8.3% 27.1% 27.7% 9.1% 10.6% 11.0% 12.2% 6.1% 5.8%
Telecom equipment/ infrastructure
Motorola Solutions 17,021 (691) 16,330 -0.2% 2.8% 49% 49% 18% 19% 20.4% 21.4% 7% 10%
Alcatel-Lucent 8,255 767 9,022 1.0% 1.2% 32% 32% 2% 4% 6.4% 8.4% NA NA
Ericsson 258,249 (28,983) 229,266 1.2% 3.0% 33% 33% 8% 10% 12.1% 13.3% 7% 8%
Finisar 2,166 (272) 1,894 14.6% 14.8% 35% 35% 14% 15% 21.4% 21.6% 6% 10%
Mean 4% 5% 37% 37% 11% 12% 15.1% 16.2% 7% 9%
CommScope
CommScope 2,760 2,703 5,462 4.0% 2.3% 35% 35% 18% 18% 19.4% 19.3% 7% 8%
04 December 2013
CommScope (COMM) 23
DCF Yields an Equity Value of $3.2 billion, or $20.11 per Share, for CommScope
Our discounted cash flow analysis for CommScope suggests a fair value of $20.11 per
share. This is based on the following assumptions.
Revenue Growth to Slow Over Time: We forecast revenue growth to accelerate to 5% in
2015. Beyond 2015, we expect revenue to slow to 3% and then 1% in the long term. We
assume a perpetual growth rate of 1%.
EBITDA Margins Stable in the Long Term: We estimate CommScope's EBITDA margins
will be stable at ~20% through 2020. As previously discussed, CommScope will likely be
growing revenue with stable margins for several years, thus maintaining strong levels of
EBITDA.
Terminal Growth Rate of 1.0% and WACC of 9.2%: For the DCF analysis, we have
assumed a terminal growth rate of 1.0% for CommScope. We estimate the weighted
average cost of capital (WACC) to be 9.2%.
Exhibit 28: CommScope WACC Calculation US$ in millions, unless otherwise stated.
Beta 1.10
Avg Cost of debt (post tax) 4.9%
Tax rate 38.5%
0 4 D
2 4
Exhibit 29: CommScope DCF Yields a Value of $20.11 US$ in millions, unless otherwise stated.
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Revenue 3,322 3,454 3,533 3,710 3,877 4,032 4,153 4,277 4,363 4,450 4,494 4,539
Gross Profit 1,061 1,193 1,221 1,283 1,321 1,354 1,373 1,393 1,418 1,446 1,438 1,430
Gross Margin (%) 31.9% 34.6% 34.6% 34.6% 34.1% 33.6% 33.1% 32.6% 32.5% 32.5% 32.0% 31.5%
SG&A 461 493 480 494 505 513 516 531 542 553 558 564
% of sales 13.9% 14.3% 13.6% 13.3% 13.0% 12.7% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4%
R&D 122 130 127 134 132 125 117 120 123 125 126 128
% of sales 3.7% 3.8% 3.6% 3.6% 3.4% 3.1% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8%
Opex non cash adjustments 23 43 15 16 19 20 21 21 22 22 22 23
EBIT 501 614 629 671 703 735 762 763 775 791 776 761
EBIT Margin 15.1% 17.8% 17.8% 18.1% 18.1% 18.2% 18.3% 17.8% 17.8% 17.8% 17.3% 16.8%
D&A 70 56 54 54 57 76 78 81 82 84 85 86
EBITDA 571 670 683 725 760 811 840 844 857 874 861 847
EBITDA Margin 17.2% 19.4% 19.3% 19.5% 19.6% 20.1% 20.2% 19.7% 19.6% 19.6% 19.1% 18.6%
Less: CAPEX 28 36 35 37 39 40 42 43 44 40 40 41
Working Capital change (65) 48 29 58 28 26 20 21 14 15 7 8
Interest Expense 185.6 210.9 168.3 141.8 77.5 40.3 20.8 21.4 0.4 0.4 0.4 0.5
Other Expense 15 54 6 18 19 20 20.8 21.4 21.8 22.2 22.5 22.7
Cash Flow before tax 407 321 446 470 596 685 737 737 777 797 790 775
Cash Taxes 132 162 172 191 250 261 271 271 275 281 276 270
Cash Tax Rate 41.6% 38.5% 36.1% 35.5% 35.5% 35.5% 35.5% 35.5% 35.5% 35.5% 35.5% 35.5%
Free Cash Flow 275 159 274 278 346 423 466 466 502 516 514 505
Summary
Terminal Value 6,231
Enterprise Value 5,891
Less: Debt 3,004
Equity Value 3,199
04 December 2013
CommScope (COMM) 25
Credit Suisse HOLT ™
Exhibit 30: HOLT ™
Implies a FV of $20.77 for CommScope in millions, except per share values.
Valuation Results
Total Economic Value 5,475
CFROI ® at 25% in the Long Term: To take a long-term perspective on valuation, we
utilize our forecasts for the next seven years until 2020 (from our discounted cash flow
analysis) for Credit Suisse HOLT valuation methodology. For fiscal 2020, we project a
Credit Suisse HOLT CFROI of 24.5%. (See Exhibit 31.)
EBITDA Margins Stable at 20% in the Long Term: If top-line growth for CommScope
declines to 1.0%, we believe EBITDA margins will likely be stable, staying at 20% in the
long term.
CFROI Results 2013 2014 2015 2016 2017 2018 2019 2020
CFROI 24.61% 23.22% 23.81% 25.11% 26.16% 27.63% 25.38% 24.51%
Transaction CFROI 10.30% 10.77% 11.56% 12.33% 13.00% 13.76% 13.21% 12.88%
Normalized Real Growth Rate 15.25% 16.77% 18.91% 21.40% 22.94% 25.28% 23.27% 21.82%
Real Growth Rate -6.28% 9.88% -0.48% -0.51% -0.55% -1.27% 7.40% 0.19%
Sales Growth 3.96% 2.30% 5.00% 4.50% 4.00% 3.00% 3.00% 2.00%
EBITDA Margins 20.20% 19.90% 19.96% 20.02% 20.12% 20.22% 19.72% 19.65%
Asset Turns 1.68 1.54 1.60 1.65 1.70 1.74 1.64 1.64
Gross Cash Flow 619 634 650 684 710 744 752 747
Non Depreciating Assets 924 935 967 1,004 1,040 1,059 1,293 1,308
Gross Investment 2,051 2,295 2,319 2,348 2,377 2,389 2,611 2,663
Life 5.6 6.8 6.8 6.8 6.9 6.9 6.9 6.9
Country Specific Discount Rate 5.00%
Size Differential -0.02%
Leverage Differential 1.56%
04 December 2013
CommScope (COMM) 26
Risks We see three primary risks to our Outperform rating on CommScope. If wireless CapEx
spending and the LTE buildouts do not occur as expected, the company will likely not
experience the growth that we currently forecast. Second, if the company's financial
performance falls short of expectations, it will likely not have the funds from free cash flow
to pay down a significant amount of debt. Third, while CommScope has the number one
market share position in its Wireless business, we may be underestimating the competitive
dynamics of the industry, which could hinder performance.
Slower Growth in Wireless CapEx: We project that wireless CapEx spending will
reaccelerate, driven by North American and Japanese carriers, LTE buildouts in Brazil,
and Vodafone's increased investment, which will subsequently drive other service
providers to spend on their networks. Should this reacceleration of spending not come to
fruition, CommScope Wireless business will not experience the levels of growth that we
currently forecast. Additionally, if the emphasis on wireless investment is driven away from
base stations related to LTE buildouts, the company's operations will not be as exposed to
this growth.
Deleveraging Not as Significant: Core to our thesis is that CommScope will benefit from
an improving end market, thus increasing revenue, as well as focus on cost management
to improve margins and free cash flow. As a result, using this cash and IPO proceeds, it
will be able to pay down debt, reducing its leverage ratio to 2.2x by the end of 2015. If the
company's financial performance is weaker than expected, it will not have the sufficient
capital not pay down as much debt as it desires. To this point, there may be concern
around the company's ability to distribute cash in the longer term.
Underestimating Competition: CommScope focuses on a very specific niche of the
wireless infrastructure market. Other communication infrastructure companies, such as
NSN, Huawei, and Alcatel-Lucent, may introduce competing products and bundle them as
part of larger sales. This would create significantly more competition than the company
currently faces.
Customer Concentration: In 2012, CommScope derived 24% of its sales from its top
three distributors, with Anixter accounting for 13% of total revenue. Due to this customer
concentration, there may be risk to the company's revenue should a relationship with a
distributor deteriorate. Additionally, CommScope may suffer if one of these distributors
loses a key customer.
04 December 2013
CommScope (COMM) 27
Management Team The senior management team at CommScope has an average of more than 25 years of
experience in connectivity solutions for the communications infrastructure industry and
have a strong track record when it comes to integrating large and small acquisitions.
Exhibit 32: A Seasoned Team
Name Position Experience
Marvin (Eddie) S. Edwards, Jr. President, CEO − President and Chief Executive Officer and a member of the Board of Directors following
the acquisition by Carlyle.
− He has also served in various capacities with Alcatel, including President of Alcatel
North America Cable Systems and President of Radio Frequency Systems.
Mark A. Olson EVP and CFO − Served as CommScope Executive Vice President and Chief Financial Officer since
February 1, 2012.
− Served as Vice President and Controller for Andrew LLC since the closing of the
Andrew acquisition. Prior to joining Andrew, he was employed by Nortel and Johnson &
Johnson.
of the Board
− Has been CommScope's Chairman of the Board since the acquisition by Carlyle.
− He served as a director of GI Delaware, a subsidiary of General Instrument Corporation
and its predecessors from 1987 to 1992. He served as President and Chairman of
CommScope, Inc. of North Carolina, or “CommScope NC,” from 1986 to 1997, and has
served as Chief Executive Officer of CommScope NC since 1976.
Randall W. Crenshaw EVP and COO − Has been CommScope's Executive Vice President and Chief Operating Officer
following the acquisition by Carlyle. From January 1, 2010 to the acquisition, he was
CommScope's Executive Vice President and Chief Supply Officer.
Claudius (Bud) E. Watts IV Director − Claudius Watts became a member of CommScope's Board of Directors following the
acquisition by Carlyle. He currently serves as a Managing Director and Head of the
Technology Buyout Group of The Carlyle Group.
Campbell (Cam) R. Dyer Director − Campbell Dyer became a member of CommScope's Board of Directors following the
acquisition by Carlyle. He currently serves as a Managing Director in the Technology
Buyout Group of The Carlyle Group, which he joined in 2002.
Source: Company data, Credit Suisse.
Marvin (Eddie) S. Edwards, Jr., President and CEO: Eddie Edwards has served as
CommScope's president and chief executive officer and a member of the board of
directors following the acquisition by Carlyle. From January 1, 2010, to the acquisition, Mr.
Edwards was CommScope's president and chief operating officer. Prior to that, he served
as CommScope's executive vice president of business development and general manager,
wireless network solutions. He has also served in various capacities with Alcatel, including
president of Alcatel North America Cable Systems and president of Radio Frequency
Systems.
Mark A. Olson, Executive Vice President and CFO: Mark Olson has served as
CommScope executive vice president and chief financial officer since February 1, 2012.
From November 2009 to January 2012, he served as CommScope's senior vice president
and corporate controller. Prior to that, he served as vice president and controller for
Andrew LLC since the closing of the Andrew acquisition. Prior to joining Andrew, he was
employed by Nortel and Johnson & Johnson.
Frank M. Drendel, Director, Chairman of the Board: Frank Drendel has been
CommScope's chairman of the board since the acquisition by Carlyle. He served as the
chairman of the board and CEO from July 28, 1997, until the acquisition. Frank Drendel
served as a director of GI Delaware, a subsidiary of General Instrument Corporation and
its predecessors from 1987 to 1992. He served as president and chairman of CommScope,
04 December 2013
CommScope (COMM) 28
Inc. of North Carolina, or CommScope NC, from 1986 to 1997 and has served as chief
executive officer of CommScope NC since 1976. From 1971 to 1976, he held various
positions within CommScope NC. Frank Drendel is a director of the National Cable &
Telecommunications Association, the principal trade association of the cable industry in
the United States, and was inducted into the Cable Television Hall of Fame in 2002. He
joined the board of directors of Tyco International, Ltd. on September 14, 2012, and
served as a director of Sprint Nextel Corporation from August 2005 to May 2008 and as a
director of Nextel Communications, Inc. from August 1997 to August 2005.
Randall W. Crenshaw, Executive Vice President and COO: Randall Crenshaw became
CommScope's executive vice president and chief operating officer following the acquisition
by Carlyle. From January 1, 2010, to the acquisition, he was CommScope's executive vice
president and chief supply officer. Prior to this role, he was executive vice president and
general manager, enterprise since February 2004. From 2000 to 2004, he served as
executive vice president, procurement, and general manager, network products group of
the company. Prior to that time, he held various positions with CommScope company
since 1985.
Claudius (Bud) E. Watts IV, Director: Claudius Watts became a member of
CommScope's board of directors following the acquisition by Carlyle. He currently serves
as a managing director and head of the Technology Buyout Group of The Carlyle Group.
Prior to joining Carlyle in 2000, he was a managing director in the M&A group of First
Union Securities, Inc. He also serves on the board of directors of Freescale
Semiconductor and formerly SS&C Technologies, Inc. and has previously served on the
boards of directors of numerous other Carlyle portfolio companies over the past 13 years.
Campbell (Cam) R. Dyer, Director: Campbell Dyer became a member of CommScope's
board of directors following the acquisition by Carlyle. He currently serves as a managing
director in the Technology Buyout Group of The Carlyle Group, which he joined in 2002.
Prior to joining Carlyle, Mr. Dyer was an associate with the private equity firm William Blair
Capital Partners, a consultant with Bain & Company, and an investment banking analyst in
the M&A Group of Bowles Hollowell Conner & Co. He also serves on the board of
directors of SS&C Technologies, Inc.
Exhibit 33: The CommScope Management Team Has Lead the Company Through Numerous Transformative Events
Management Team Has Brought CommScope Through Multiple Transformative Events
1976 1980 1983 1986 1988 1990 1997 2004 2007 2011 2012 2013
CommScope founded
as independent
Drendel
Group for M/A-COM
04 December 2013
CommScope (COMM) 29
Financial Statements Exhibit 34: CommScope Annual Income Statement in millions, unless otherwise stated.
In millions, except EPS FY 2011 FY 2012 FY 2013E FY 2014E
Total revenues 3,275 3,322 3,454 3,533
Y/Y % change 37.5% 1.4% 4.0% 2.3%
Cost of goods sold (non-GAAP) 2,445 2,261 2,260 2,311
Gross profit (non-GAAP) 830 1,061 1,194 1,221
Gross margin (non-GAAP) 25.4% 31.9% 34.6% 34.6%
SG&A (non-GAAP) 581 461 493 480
% of revenues 17.8% 13.9% 14.3% 13.6%
Research & development (non-GAAP) 118 122 131 127
% of revenues 3.6% 3.7% 3.8% 3.6%
EBITDA 463 571 670 683
EBITDA margins 14.1% 17.2% 19.4% 19.3%
Total operating expenses (non-GAAP) 450 560 580 592
Total operating expenses (GAAP) 1,019 822 862 790
% of revenues 13.8% 16.8% 16.8% 16.8%
Operating income (non-GAAP) 380 501 614 629
Operating margin (non-GAAP) 11.6% 15.1% 17.8% 17.8%
- -
- - - -
Income tax expense (non-GAAP) 120 132 162 172
Non-GAAP income tax adjustment (230) (100) (89) (77)
Income tax expense (GAAP) (110) 32 73 94
Tax rate (non-GAAP) 47.8% 41.6% 38.5% 36.1%
Net income (non-GAAP) 131 185 259 303
Net margin (non-GAAP) 4.0% 5.6% 7.5% 8.6%
Non-GAAP EPS $0.84 $1.20 $1.61 $1.66
GAAP EPS ($2.53) $0.03 ($0.01) $0.89
Basic shares outstanding 155 155 163 183
Diluted shares outstanding 155 155 163 183
04 December 2013
CommScope (COMM) 30
Exhibit 35: CommScope Annual Balance Sheet in millions, unless otherwise stated.
FY 2011 FY 2012 FY 2013E FY 2014E
Cash and cash equivalents 317.1 264.4 199.3 227.6
Investments - - - -
Inventories, net 338.1 312.0 338.1 340.5
Prepaid Income taxes - - - -
Deferred income taxes 77.4 61.1 56.6 56.6
Total current assets 1,367.3 1,287.3 1,257.3 1,302.7
- - - -
Investments - - - -
Intangible assets, net 1,783.6 1,578.7 1,433.3 1,256.0
Deferred income taxes - - - -
- - - -
Income taxes payable - - - -
Current portion of long term debt 12.3 10.8 0.6 0.6
Total current liabilities 513.7 549.6 526.4 514.8
- - - -
Pension and postretirement
Other noncurrent liabilities 106.9 99.7 129.8 109.9
Total liabilities 3,788.1 3,611.0 3,500.9 3,164.0
- - - -
Retained earnings (252.3) (447.7) - -
Total Stockholders' Equity 1,365.1 1,182.3 1,059.2 1,229.0
Total Liabilities and Equity 5,153.2 4,793.3 4,560.1 4,393.0
04 December 2013
CommScope (COMM) 31
FY 2011 FY 2012 FY 2013E FY 2014E
Net income / (loss) (392.325) 5.346 (5.982) 163.027
Non-cash adjustments - - - -
Amortization of discount on convertibles - - - -
Share-based compensation 30.382 7.525 16.429 15.280
Impairment of property and equipment 126.057 40.907 41.802 -
Impairment of other intangible assets - - - -
Deferred income taxes (174.536) (48.713) (20.127) (11.885)
Excess tax benefit from share-based compensation - - - -
Loss on conversion of debt securities 89.788 - - -
Other Reconciling items - - - -
Inventories 121.344 18.186 (28.039) (2.362)
Prepaid expenses and other assets 25.352 3.854 (14.415) 0.561
Accounts payable, accrued liabilities and other (50.833) 10.478 (11.753) (67.463)
Other (4.704) 2.155 14.548 -
- - - -
Cash Flow from Investing Activities: - - - -
Net proceeds from sale of property and equipment 12.077 2.345 1.282 -
Additions to property and equipment (39.533) (27.957) (35.929) (35.329)
Purchases of investments - - - -
Maturities of investments - - - -
Other (2.246) 2.301 2.900 -
Purchases of intangible assets - - - -
Proceeds from sale of product line - - - -
Net Cash From Investing Activities (3,171.476) (35.525) (87.517) (35.329)
- - - -
Proceeds from issuance of long term debt 2,723.100 299.150 747.072 -
Repayment of long term debt (1,597.957) (394.356) (821.446) (270.535)
Long term financing cost (86.962) (2.701) (13.074) -
Proceeds from issuance of common stock 1,606.599 - 433.000 -
Tax benefits from share-based compensation - - - -
Repurchase of common stock - - - -
Tax withholding payments reimbursed - - - -
Net Cash From Financing Activities 2,655.276 (299.522) (204.585) (270.535)
- - - -
- - - -
Net Change in Cash & Cash Equivalents (388.927) (52.734) (65.058) 28.290
Cash and Cash Equivalents, Beginning - 317.102 264.375 199.317
Cash and Cash Equivalents, Ending 317.087 264.469 199.317 227.607
04 December 2013
CommScope (COMM) 32
AT&T (T.N, $34.8) Alcatel-Lucent (ALUA.PA, €3.255) Amphenol Corporation (APH.N, $85.05) Anixter International (AXE.N, $88.73) China Mobile Limited (0941.HK, HK$83.9) China Telecom (0728.HK, HK$4.2) China Unicom Hong Kong Ltd (0762.HK, HK$12.32) Comba Telecom Systems Holdings Limited (2342.HK, HK$2.65) CommScope (COMM.OQ, $16.74, OUTPERFORM[V], TP $20.0) Ericsson (ERICb.ST, Skr81.15) Finisar Corporation (FNSR.OQ, $19.8) Motorola Solutions (MSI.N, $65.66) Nokia (NOK1V.HE, €5.89) Sprint Corp (S.N, $8.2) T-Mobile US Inc (TMUS.N, $26.49) Verizon Communications Inc (VZ.N, $49.26) Vodafone Group (VOD.L, 226.0p)
Disclosure Appendix
Important Global Disclosures
I, Kulbinder Garcha, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012 , U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and n on-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
04 December 2013
CommScope (COMM) 33
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Outperform/Buy* 42% (54% banking clients)
Neutral/Hold* 41% (49% banking clients)
Underperform/Sell* 15% (40% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for CommScope (COMM.OQ)
Method: We use the average value calculated by three methods for our $20 target price: (1) 6.5x our 2014 estimated EV/EBITDA (comparing EV/EBITDA multiples with peers), (2) discounted cash flow (DCF) analysis using a 9.2 WACC, and (3) Credit Suisse HOLT analysis.
Risk: We see three risks to our Outperform rating on CommScope. If wireless capex spending and the LTE buildouts do not occur as expected, the company will likely not experience the growth that we currently forecast. Second, if the company's financial performance falls short of expectations, it will likely not have the funds from free cash flow to pay down a significant amount of debt. Third, while CommScope has the number one market share position in its Wireless business, we may be underestimating the competitive dynamics of the industry, which could hinder performance.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (COMM.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (COMM.OQ) within the past 12 months.
Credit Suisse has managed or co-managed a public offering of securities for the subject company (COMM.OQ) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (COMM.OQ) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (COMM.OQ) within the next 3 months.
As of the date of this report, Credit Suisse makes a market in the following subject companies (COMM.OQ).
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (COMM.OQ) within the past 12 months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (COMM.OQ) within the past 3 years.
04 December 2013
CommScope (COMM) 34
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
Important Credit Suisse HOLT Disclosures
With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report.
The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.
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