Uniti Group Stock: Undervalued 11%-Yielder Has 65% Upside
December 11, 2023
Why Investors Should Consider UNIT Stock
Some technology companies are all about the flash. For others, they’re all about providing a service that everyone needs but no one really thinks about. That out-of-sight, out-of-mind approach has served Uniti Group Inc (NASDAQ:UNIT) just fine.
Uniti is a specialty real estate investment trust (REIT) that acquires and constructs mission-critical communications infrastructure in the form of fiber optic, copper, and coaxial broadband networks.
The company is the second-largest independent fiber provider in the country. It provides reliable, high-speed connectivity and networking services to more than 28,000 customers nationwide.
The company owns and operates 139,000 fiber route miles and 8.4 million fiber strand miles, covering 300,000 commercial buildings in 300 metropolitan markets. Most of its network is located in the eastern and midwestern portions of the U.S. (Source: “BofA Securities 2023 Leveraged Finance Conference Presentation,” Uniti Group Inc, November 28, 2023.)
Uniti Group’s big footprint helps it generate high-margin, recurring revenues with typical lease-up yields of more than 50%, resulting in cumulative cash yields of more than 20%.
The remaining time on its average contracts is about seven years, and it currently has about $6.5 billion worth of revenues under contract.
Uniti Group Inc must be good at what it does; its monthly churn rate is an industry-leading 0.2%.
The company has lots of room for growth, too. Its fiber is available in about 300 metropolitan markets, but its enterprise services are only in about 30 markets. The REIT’s average market share of enterprise sales is less than five percent.
Uniti Group Inc’s tenants have included Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T), and T-Mobile US Inc (NASDAQ:TMUS). Uniti Group’s infrastructure assets are also leased to Internet giants like Amazon.com Inc (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG).
Backbone of the Communications Industry
Most people don’t think about communications infrastructure, but all communication end markets rely on fiber. This includes the mobile broadband, fixed wireless, fiber-to-the-home, small cell, fiber-to-the-tower, hyperscaler connectivity, and artificial intelligence (AI) markets.
This covers broadcasting, cable, satellite, wireless, and wireline—everything. And it’s used by everyone, including the IT, telecom, manufacturing, retail, government, home, and office sectors.
The communications industry has been experiencing tremendous market growth, with a rising demand for high-capacity long-haul routes. The annual North American wavelength sales are currently about $2.0 billion, and they’re expected to grow at an annual rate of about seven percent.
The high demand comes from bandwidth-intensive services such as social media, streaming, 5G, smart devices, and cloud applications.
Uniti Group Inc Reported “Another Solid Quarter” & Reiterated Guidance
For the third quarter ended September 30, Uniti Group announced that its total revenues increased by 2.6% year-over-year to $290.7 million. Of that, $214.5 million, or $73%, was from its leasing division. The remainder, $76.0 million, or 27%, was from Uniti Fiber. (Source: “Uniti Group Inc. Reports Third Quarter 2023 Results,” Uniti Group Inc, November 2, 2023.)
Its third-quarter net loss improved significantly to $80.9 million, or $0.34 per share, from a net loss of $155.0 million, or $0.66 per share, in the third quarter of 2022.
The REIT’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew by 3.5% to $233.0 million, with margins of approximately 80%. Its adjusted funds from operations (AFFO) came in at $95.3 million, or $0.35 per share.
Commenting on the results, Kenny Gunderman, Uniti Group Inc’s president and CEO, said, “We delivered another solid quarter of results and consolidated bookings, demonstrating the resiliency of demand for fiber infrastructure and our overall business despite the current challenging macroeconomic environment.”
Uniti Group Inc’s management reiterated its full-year 2023 guidance:
- Revenues in the range of $1.15 billion to $1.17 billion (compared to $1.1 billion in 2022)
- Adjusted EBITDA in the range of $915.0 to $935.0 million (compared to $905.5 million in 2022)
- Funds from operations (FFO) in the range of $161.0 to $181.0 million (compared to $202.9 million in 2022)
- AFFO in the range of $373.0 to $393.0 million (compared to $455.1 million in 2022)
Uniti Group Stock’s Quarterly Dividend Maintained at $0.15/Share
When most people think of tech stocks, they don’t think about high-yield dividends. Fortunately, for a business to qualify as a REIT, it legally has to distribute at least 90% of its taxable income to shareholders as dividends.
In early November, Uniti Group Inc’s board declared a quarterly cash dividend of $0.15 per share, for a yield of 11.12% (as of this writing).
That’s massive, especially compared to technology giants like Microsoft Corp (NASDAQ:MSFT), which has a yield of 0.79%, and NVIDIA Corp (NASDAQ:NVDA), which has a yield of just 0.03%.
Share Price Up 59% Over Last 6 Months & Has 65% Upside
Big inflation-crushing dividends are great, but another thing Uniti Group Inc has going for it is significant share-price gains. As of this writing, UNIT stock is up by about 30% over the last month and about 60% over the last six months.
Big gains, and better days seem to be ahead. Wall Street analysts have provided a high 12-month share-price forecast of $9.00. This points to potential upside of 65.4%.
Chart courtesy of StockCharts.com
The Lowdown on Uniti Group Inc
As mentioned earlier, Uniti Group is a specialty REIT that acquires and builds mission-critical communications infrastructure. It’s a leading provider of fiber and other wireless solutions to the U.S. communications industry.
The company recently reported another quarter of tremendous financial results and reaffirmed its full-year guidance. Management says the REIT is “well positioned to weather any potential prolonged economic headwinds.”
Uniti Group Inc has no significant debt maturities until 2027, has minimal floating-rate debt, and has nearly $7.0 billion of revenues under contract, with an average remaining term of seven years.
