A decline in consumer sentiment and concerns over a potential recession have led to increased market volatility. The telecom company Shenandoah Telecommunications Company (SHEN) rated an F, which translates to a Strong Sell in our proprietary rating system, has been struggling with weak financials and declining dividend payouts.

Moreover, considering its bleak financial outlook, it seems that more downsides are ahead for this telecom stock. This article examines the various factors contributing to SHEN’s declining performance and the potential downside risk for investors.

March’s Consumer Price Index (CPI) report showed that inflation is continuing to decrease, with CPI rising only 0.1% in March and 5% from a year ago, resulting in a 5.6% annual rate of inflation.

However, retail sales experienced a sharper decline than the previous month, dropping 1% in March from February, indicating a potential weakening of consumer demand.

Moreover, as per a University of Michigan survey, consumer sentiment in March fell for the first time in four months, dropping 8% below February levels.

Additionally, the Federal Reserve’s March meeting minutes revealed that the central bank’s staff economists are predicting a mild recession later this year due in part to concerns over reduced lending and its impact on economic growth.

SHEN provides broadband services through its high-speed, state-of-the-art fiber-optic and cable networks to customers in the Mid-Atlantic United States.

The company incurred losses in the previous fiscal year, 2022, and its capital expenditures for the year totaled $189.60 million, marking a $29.50 million increase from the previous year’s spending. This was largely due to higher expenses in the Broadband segment.

Moreover, while the company pays dividends, its dividend payouts have declined at CAGRs of 34.9% and 21% over the past three and five years. Declining dividend payouts could be a sign of financial weakness and may be a cause for concern for investors.

Furthermore, the stock has declined 14.6% over the past year to close the last trading session at $20.31.

Here’s what could shape SHEN’s performance in the near term:

Weak Financials

SHEN’s total operating expenses rose 11.2% year-over-year to $275.33 million for the fiscal year that ended December 31, 2022. Its operating loss rose 227.5% from the prior year to $7.96 million.

Its net loss came in at $8.38 million, compared to a net income of $998.83 million in the prior year. Also, its net loss per share amounted to $0.17, compared to a net EPS of $19.92 in the fiscal year 2021.

Bleak EPS Growth Expectations

Analysts expect SHEN’s EPS to decline 115.6% year-over-year to negative $0.37 in the fiscal year 2023. Its loss per share for the previous quarter, which ended March 2023, is expected to rise 695% from the previous-year quarter to $0.08. Moreover. Its loss per share for the current fiscal quarter ending June 2023 is likely to grow 40% year-over-year to $0.08.

Also, the company missed the consensus EPS estimates in three of the trailing four quarters, which is disappointing.

Stretched Valuation

SHEN’s forward P/S multiple of 3.60x is 190.5% higher than the industry average of 1.24x. Its forward EV/Sales multiple of 3.90x is also 113.9% higher than the industry average of 1.82x, and its forward EV/EBITDA of 13.90x is 63.9% higher than the industry average of 8.48x.

POWR Ratings Reflect Bleak Outlook

SHEN has an overall rating of F, translating to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has an F grade for Value consistent with its stretched valuation.

Its D grade in Growth and Sentiment is in sync with its weak performance in the latest quarter and weak analysts’ estimates.

SHEN is ranked #16 among 19 stocks in the D-rated Telecom – Domestic industry.

Click here to access SHEN’s Momentum, Stability, and Quality grades.

Bottom Line

SHENs financials are weak. Moreover, analysts are expecting a decline in EPS for the fiscal year 2023.

The company’s total operating expenses have risen year-over-year, while its operating loss has skyrocketed. As a result, the company reported a net loss in the previous fiscal year, 2022.

Furthermore, the company’s dividend payouts have declined significantly over the past few years.

These factors, combined with economic uncertainty, could potentially lead to further downside for this low-rated telecom stock. So, it might be ideal to avoid the stock.

Stocks to Consider Instead of Shenandoah Telecommunications Company (SHEN)

Unfortunately, the odds of SHEN outperforming in the weeks and months ahead are significantly compromised. However, many good stocks in the Telecom-Domestic industry have impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks instead:

Ooma, Inc. (OOMA)

Spok Holdings, Inc. (SPOK)

IDT Corporation Class B (IDT).

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SHEN shares were unchanged in premarket trading Tuesday. Year-to-date, SHEN has gained 27.90%, versus a 9.12% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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