Source : Globe & Mail

Cogeco Cable Inc. stock is likely to head back toward its former highs, now that its acquisition streak is apparently at an end, analysts say.

"In part, Cogeco Cable traded at low levels due to concerns that management will make an additional material acquisition in Europe," Desjardins Securities analyst Joseph MacKay wrote in a note to clients Monday morning.

"Given the recent three acquisitions in Ontario, we believe the potential for a near-term acquisition in Europe has declined significantly, with Cogeco Cable management now likely to focus on integrating the three acquisitions in FY09."

Since March, Cogeco Cable has purchased MaXess Networx, FibreWired Burlington Hydro Communications, and Toronto Hydro Telecom Inc. All three companies offer their customers Internet and phone service. In 2006, Cogeco Cable bought Cabovisao-Televisao por Cabo SA of Portugal for $660-million.

Investors pounded the stock when the Portuguese acquisition was announced, causing a single-day 17 per cent drop. Dvai Ghose of Genuity Capital says the stock continues to be discounted because of the European expansion strategy, even though it will likely lead to steadier profits in the future once the Canadian market levels out.

"People are being very narrow-minded in their geographic approach to this story," Mr. Ghose says. "They have fundamentally overreacted because it's not in Canada. They don't seem to realize that you can make money outside the country."

While competitors such as Vidéotron Ltée and Shaw Communications Inc. focus on expanding wireless networks for future growth, Mr. Ghose says Cogeco Cable has chosen to offer its traditional cable services in countries such as Portugal that are not as saturated with service providers.

"One assumes that market shares will level out," he says. "After telephony, what drives growth? The competitors are risking more in a new sector, wireless. Cogeco Cable is investing in another part of the world in an area that it knows. I can understand why people are wary about buying something in your industry in another country, but I don't understand why they seem more wary about it being more risky than buying wireless at home."

Stephen Chartier, an analyst at Accountability Research Corp. in Toronto, rates the stock "undervalued," given the company's history of strong revenue growth. And with credit markets tightened, it's probably safe to eliminate the possibility of further acquisitions for some time.

"I think their Portuguese acquisition suggests they have an interest in building up that area, but near-term the likelihood is reduced, given the environment," he said.

Mr. Chartier expects revenue to increase by 11.7 per cent in 2008, and 8.3 per cent in 2009. He has a price target of $49.30.

"Cogeco Cable is undervalued against its peers in several respects, and the company's solid prospects in a recession-resistant business argue for an improving share price," he wrote in his latest research report.

Cogeco Cable started trading Monday at $37.87 a share, and Desjardins has reiterated its target to $57. That's not far off its 52-week high, of $52.58, reached last July.

Ten analysts follow the stock, with an average forecast of $56.30. The company reports its third quarter earnings on Wednesday, with the consensus estimate from Bloomberg at 55 cents a share.

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