Trade Of The Week

Zayo Group Open Interest Positioned Bullish into Recent Pullback 

Date: January 16, 2017

Stock: ZAYO

Trade Details:

Zayo Group (ZAYO) shares have sold off recently back to the rising 200-MA and continue to draw bullish options positioning with March and June months the most often targeted. ZAYO has notable open interest in the March $37.50 calls with more than 6,950 in open interest and the June $35 and $37.50 calls with over 6,000 each in open interest. Buyers accumulated positions in December with the options profitable with a move back above $38.50 at expiration, a notable move by the underlying with the recent weakness.

Fundamental Analysis: 

The $7.6B provider of communications infrastructure trades at 4X sales and 39.4X cash with 12-13% EPS growth over the next five years. ZAYO is targeting 6.8% Y/Y sales growth in 2017 after five consecutive years of double-digit gains. The company reported 37% sales growth in the November quarter and closing on a number of notable deals in the fourth quarter. On 11-7, the company announced a $12.8M deal for its first data center in Silicon Valley, one of the biggest markets for dark fiber and a deal expected to contribute to EBITDA by more than $1M annually. On 10-7, the company announced a deal for its fourth data center in Chicago and also was chosen for the UK’s multi-national bank core UK network. On 11-30, the company announced a $1.42B deal for Electric Lightwave which expands their footprint in the West Coast. The deal adds over 8,000 miles of long haul fiber to their network and is expected to have over $40M in synergies per year during the integration process. ZAYO also assumes $400M in NOL carryforwards in the deal.

 

Analysts have an average target for shares of $33 with 10 buy ratings, 5 hold ratings, and 1 sell rating. Stifel initiated coverage on 1-13 with a Buy rating and $40 price target, a Street High. On 1-3, BTIG was out positive seeing the company as a potential acquisition target for cable operators which could extend the footprint of someone like Comcast (CMCSA). Analyst Walter Piecyk thinks that Verizon (VZ) or Crown (CCI) could also be interested if the company was put into play as a target. Sun Trust was out positive starting shares at Buy in December noting the company is strong in dark fiber and its leverage to enterprise cloud should be a growth tailwind going forward.

 

Institutional ownership rose 17.5% last quarter, Zimmer Partners and Senator Investment notable owners of shares with more than 5M each. Short interest is 4.63%.

 

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