Cincinnati Bell Is Poised for Growth in 2011

Mar.25.11 | About: Cincinnati Bell (CBB)

We are maintaining our long-term Neutral recommendation on Cincinnati Bell Inc. (NYSE:CBB) supported by the Zacks # 3 Rank ('Hold') .

Though Cincinnati Bell reported lackluster fourth quarter bottom-line results, fiscal 2010 results exceeded its own guidance. The company reported revenue and adjusted EBITDA of $1.38 billion and $502 million, respectively, beating its outlooks of $1.30 billion and $500 million.

We believe strong fiscal 2010 results and recent acquisitions have laid a foundation for the company’s growth this year. For fiscal 2011, Cincinnati Bell expects revenue and adjusted EBITDA of approximately $1.4 billion and $530 million, respectively.

The company is focused on its goal of becoming the preferred collocation provider to the Fortune 1000. In this regard, the companyshifted its debt maturities to 2017 and beyond to utilize strong cash flow for profitable data center collocation opportunities.

Cincinnati Bell successfully completed the CyrusOne acquisition earlier in 2010. The company’s Data Center Colocation and IT Services and Hardware segments are doing well while Wireline and Wireless segments are under performing.

In the wireline business, the company’s Fioptics products are growing since their introduction in 2009, covering 79,000 homes at the end of 2010 and being on track to reach its goal of covering about 150,000 homes by the end of 2011.Further, we believe Cincinnati Bell has stable long-term prospects driven by its 3G wireless service coupled with handset offerings that are expected to drive data revenue growth going forward.

Although management remains optimistic about opportunities for its data center services business and the expansion of its Fioptics products, we remain cautious that long-term maturities may impact the company’s ongoing expansion. The company is highly leveraged with total debt of $2.52 billion at the end of 2010, which was up 28% from last year.

Additionally, Cincinnati Bell continues to experience erosion in local access lines as Tier-1 competitors such as AT&T Inc. (NYSE:T) and Verizon Communications (NYSE:VZ) shifted its technology toward wireless services. Also, theintegration of CyrusOne might be challenging and time consuming.

Given the pros and cons, we have a neutral stance at present.