Tucows is fully valued, Echelon Wealth Partners says

Weaker than expected gross margins contributed to a disappointing second quarter bottom line for Tucows Inc. (TSX:TC, NASDAQ:TCX), says analyst Ralph Garcea of Echelon Wealth Partners, who on Thursday maintained his “Hold” recommendation with a lowered price target of C$75.00 (previously C$80.00).

Internet services company Tucows reported its Q2/2018 results on Thursday, posting an Adjusted EBITDA of $11.2 million on revenue of $81.1 million and EPS of $0.33 (all figures in US dollars unless noted otherwise).

The company’s wireless service and fibre Internet provider Ting saw gross margin for the quarter of roughly 27 per cent, which came in below Garcea’s estimate of 38 per cent. The analyst expressed skepticism on Tucow’s ability to generate the profits for 2018 that management previously proposed and restated on Wednesday.

“The company reiterated guidance of $54 million in Adjusted EBITDA for 2018; we assert the likelihood of the guidance to be below the probability of meeting it due to fibre delays and lack of margin robustness given how H118 has gone,” says Garcea.

“Tucows’ strong growth initiatives in fibre are costly, but over time provide a robust risk/reward with its de-risking techniques,” says the analyst. “With cash sitting at $11.2 million, quarterly CFOPS of ~$12-15 million plus, and a credit facility of up to $140 million, we believe TC has ample financing needed to expand Ting Mobile/Internet.”

Garcea says based on his 2018 estimates, Tucows is currently trading at an EV/Sales, EV/EBITDA and P/E of 1.9x, 12.9x, and 26.9x, respectively, versus its Internet domain sector peer averages of 6.1x, 19.1x and 20.1x, respectively.

The analyst’s reduced price target of C$75.00 represents a projected return of one per cent at the time of publication.