Cogeco: A Margin-Driven Turnaround in a Defensive Sector

The first-quarter results for Cogeco present a clear divergence between top-line pressure and bottom-line resilience. The company posted earnings per share of $2.11, a beat of 3.43% against expectations. This marks a solid execution on the cost and margin side. Yet the headline revenue figure tells a different story: consolidated revenue declined 4.9% year-over-year to $707.25 million, falling short of forecasts. This aligns with the company's own guidance for an annual revenue decline in the low to mid-single digits, or roughly 1-3%.

The core investment thesis here is a margin-driven turnaround. While adjusted EBITDA declined 3.7%, the company's ability to outperform on EPS suggests disciplined capital allocation and operational efficiency are offsetting top-line erosion. This is not a new strength; Cogeco has a history of maintaining a 49.7% Adjusted EBITDA margin, which outperforms the industry average. The market's positive reaction, with the stock rising 1.63% post-earnings, signals that investors are pricing in this profitability resilience more than the revenue decline.

For institutional investors, this sets up a classic defensive sector play. The telecommunications landscape, particularly in Canada, is marked by competitive pricing pressures and structural subscriber headwinds. Cogeco's results confirm it is navigating these challenges. The beat on earnings, despite the revenue miss, highlights a company successfully managing its cost structure and capital allocation to protect cash flow. The focus now shifts to whether this margin discipline can be sustained and leveraged as the company executes its three-year transformation, aiming to turn around its U.S. broadband subscriber growth in the second half of the year.

The Turnaround Engine: U.S. Subscriber Trends and Canadian Resilience

The margin resilience reported last quarter is not a function of top-line growth, but a direct result of a clear operational divergence. The company is executing a two-pronged turnaround: a visible improvement in its U.S. business is beginning to offset structural pressures in Canada, where stability is the baseline.

In the United States, the operational engine is firing. Management confirmed that subscriber trends improved for a second consecutive quarter, delivering the company's best U.S. customer metrics in the past 15 quarters. This marks a tangible inflection point after a period of decline. The company is deploying new sales strategies and accelerating network upgrades, including the introduction of 2.5 Gigabit speeds, to capitalize on the structural opportunity in the U.S. market where penetration remains low in many areas. The financial payoff is expected to follow, with management guiding for more meaningful improvement in the second half of fiscal 2026 and stating the U.S. business is "trending towards" a neutral EBITDA by year-end. This is the core of the margin story: a turnaround in customer dynamics that should flow through to the bottom line.

Meanwhile, the Canadian segment provides a stable, if modest, foundation. Revenue held steady, and adjusted EBITDA increased 2% in constant currency. The company added 8,900 internet subscribers in the quarter, a positive sign of customer acquisition. However, this growth is being tempered by competitive pressures, with management noting that wireline competition "got a little heated" during the holiday period, leading to expectations for more modest wireline customer growth in the second quarter. The Canadian story is one of disciplined execution-cost reductions from the ongoing transformation program are supporting EBITDA-but not explosive expansion.

For institutional investors, this sets up a classic sector rotation trade. The U.S. business represents a high-conviction, turnaround narrative with improving fundamentals. The Canadian business offers defensive stability and cash flow generation. The portfolio construction implication is clear: overweight the U.S. exposure as the operational turnaround gains traction, while maintaining a core holding in Canada for its quality and resilience. The margin-driven profitability beat was a function of this very divergence.

Valuation, Sector Rotation, and Institutional Positioning

The institutional case for Cogeco hinges on its position within a sector that is stabilizing but offering limited growth. The broader Canadian telecom landscape is expected to see modest revenue growth improve from approximately 1% in 2025 to 2% in 2026. This sets a low bar for expansion, but it also provides a floor for valuation. Major players are currently trading at forward EV/EBITDA multiples of 6.4x-7.3x, a discount to their cyclical peak. This reasonable starting point leaves room for multiple expansion if companies can demonstrate execution on margin improvement or growth initiatives.

For Cogeco, the path to multiple expansion is directly tied to its turnaround. The company is trading at a discounted 5.3x forward EV/EBITDA, reflecting its challenging recent history and the execution risk of its three-year transformation. The catalyst for a re-rating is clear: sustained improvement in its U.S. business, as evidenced by the recent subscriber inflection, must translate into a visible EBITDA recovery. Management's guidance for the U.S. business to trend toward neutral EBITDA by year-end is the first step. If this materializes, it could unlock the multiple expansion potential that RBC Capital Markets sees in other operators like Rogers and Quebecor.

Yet a significant risk premium remains. Cogeco's high leverage ratio of 3.2x net debt/EBITDA presents a structural constraint. While not extreme, this level of debt limits financial flexibility and amplifies earnings volatility, making the stock more sensitive to interest rate changes or a slowdown in cash flow generation. This leverage trade-off is a key filter for institutional flows. For portfolios seeking pure defensive rotation or value, the high debt load may be a deterrent. The stock's appeal is more nuanced, fitting a quality factor play where investors are willing to accept higher leverage for the potential of operational turnaround and margin expansion.

From a portfolio construction standpoint, Cogeco represents a tactical overweight within the defensive sector. It offers a higher-conviction, turnaround narrative compared to the sector's stable but stagnant core. However, its leverage ratio means it is less of a pure defensive play and more of a quality-at-a-discount bet. For institutional investors, the positioning is clear: Cogeco is a candidate for a selective allocation within a telecom or Canadian equity portfolio, but it should not be a core holding for those prioritizing balance sheet safety over growth potential. The stock's valuation leaves little room for error, making execution on its U.S. turnaround the sole path to a re-rating.

Catalysts, Risks, and Portfolio Construction Implications

The forward-looking setup for Cogeco is defined by a clear set of catalysts and constraints. For institutional investors, the path to a re-rating hinges on validating the U.S. turnaround narrative, while the high leverage ratio acts as a persistent risk filter.

The key near-term catalyst is the sustained improvement in U.S. EBITDA performance through the second half of fiscal 2026. Management has explicitly guided for the U.S. business to "trend towards" a neutral EBITDA by year-end. The first-quarter results, while showing improved subscriber trends, also revealed a decline in U.S. adjusted EBITDA of ~9.1%. This creates a high bar for the coming quarters. Portfolio managers must watch for sequential improvement in the U.S. segment's profitability to confirm the operational turnaround is translating into financial results. Any deviation from this trajectory would challenge the core thesis for multiple expansion.

The primary risk is the company's high leverage, which could pressure free cash flow and limit strategic flexibility. With a net debt/EBITDA ratio of 3.2x, the company operates with a moderate but meaningful financial load. This ratio is a structural constraint in a sector where consolidated revenue is expected to decline. In a rising interest rate environment or during a prolonged period of top-line pressure, this leverage amplifies earnings volatility and could constrain the capital available for network investments or shareholder returns. It is the key risk premium that must be priced into any position.

Beyond the immediate EBITDA target, watch for execution on strategic initiatives that could drive future subscriber growth. The company is ramping sales channels and strengthening marketing capabilities in the U.S., including the launch of an "oxio-like fully digital second brand" next month. This digital-first approach aims to capture market share in a competitive landscape. Concurrently, the introduction of 2.5 gigabit speeds and fiber expansion in Canada are critical for retaining and upselling customers. Success in these areas will determine whether the company can achieve the "repeatable" customer growth its CEO targets.

For portfolio construction, this creates a high-conviction, but high-risk, allocation. The stock is a tactical overweight for investors willing to accept leverage for the potential of a margin-driven turnaround. However, it is not a core holding for defensive or balance-sheet-focused portfolios. The watchlist is clear: monitor U.S. EBITDA trends, leverage metrics, and the execution of network and brand initiatives. The payoff is a re-rating; the risk is that leverage and sector headwinds cap that upside.