JP Morgan Initiates Zayo At Overweight, Notes Rapidly Growing Industry Demand

In a report published Friday, JP Morgan analyst Philip Cusick initiated coverage of Zayo Group Holdings Inc (NYSE: ZAYO) with an Overweight rating and $33 price target as the company is poised to benefit from industry-wide growth.

According to Cusick, the global demand for bandwidth is rapidly growing while Cisco Systems estimates a 21 percent compounded annual growth rate in data traffic through 2018. At the same time, enterprises, learning institutions and hospitals increasingly look to manage their own networks that will create demand for dark fiber in addition to lit services.

Cusick continued that Zayo was founded with the objective of satisfying this demand that is often ignored by traditional providers who prefer not to lease out their fiber asset. The company's 50/50 mix of "dark" and "lit" services offers customers various choices and levels of network control while its fiber assets provide a higher operating leverage and incremental margins.

The analyst noted that Zayo is one of the largest, if not the single largest, provider of dark fiber in the U.S. The company's business plan is built around acquiring as much metro fiber as it can to lease them to customers at "very high" incremental margins.

"Zayo has been able to acquire a substantial portfolio of fiber assets through acquisitions and its own builds, with customers paying for a substantial portion of the capex," Cusick wrote. "With its large portfolio of fiber assets, Zayo's incremental margin from selling existing lit capacity and leasing dark fiber is one of the highest in the industry at approximately 70 percent."