CABO - Cable One

[ArminvanBuyout]

Anyone have any thoughts on Cable One?

 

Was spun off from Graham Holdings on July 1st, and is now trading at around the spin-off value.

 

I personally am quite bullish on the company due to its transformation from video to broadband.

[Liberty]

You'll find some discussion about it here:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ghc-graham-holdings/

[folivera13]

HSD rate increase announcement: http://ir.cableone.net/file/Index?KeyFile=31184471

[zippy1]

Q3 results.

http://finance.yahoo.com/news/cable-one-reports-third-quarter-030500247.html

Key third quarter highlights:

 

Net Income was $19.4 million and Adjusted EBITDA1 was $77.4 million, an increase of 6.2% compared to the third quarter of 2014, with an Adjusted EBITDA Margin1 of 39.1% compared to 36.5% in the third quarter of 2014.

Net cash provided by operating activities was $77.5 million. Free Cash Flow1 was $46.0 million, an increase of 123.5% compared to the third quarter of 2014.

Business services revenues were $22.4 million, an increase of 15.2% compared to the third quarter of 2014.

Residential data revenues were $73.1 million, an increase of 10.2% compared to the third quarter of 2014.

Residential data and business services revenues grew to 48.2% of total revenues compared to 43.0% in the third quarter of 2014.

Non-video customers grew from 31% in the third quarter of 2014 to 42% of total customers.

Capital expenditures totaled $31.4 million, a decrease of 39.9% compared to the third quarter of 2014.

[dwy000]

Had to reluctantly exit this one.  The only reason for hanging on is the hope that Charter or Comcast will ultimately come in and consolidate them.  Their operating strategy is highly questionable.  They are almost asking video customers to leave.  Dropped the Viacom channels as well as another content provider and replaced them with no name channels - all while jacking up the price.  No wonder there is 20% y-o-y reductions in video customer count.  I get their arguments but can't say I agree with it.  I think it will take down their attractiveness as an acquisition target and will hurt long term value.

[seeker]

Had to reluctantly exit this one.  The only reason for hanging on is the hope that Charter or Comcast will ultimately come in and consolidate them.  Their operating strategy is highly questionable.  They are almost asking video customers to leave.  Dropped the Viacom channels as well as another content provider and replaced them with no name channels - all while jacking up the price.  No wonder there is 20% y-o-y reductions in video customer count.  I get their arguments but can't say I agree with it.  I think it will take down their attractiveness as an acquisition target and will hurt long term value.

 

You are missing the picture. They are clearly de-emphasizing video as these customers are not as profitable. Viewing trends are clearly moving to broadband and they have been ahead of the curve. HSD margins are 5x video margins and Business Services margins are 6x video margins. Both segments growing very well. Video subs are down 36% since 2012, yet EBITDA is up 11% over 2012 and EBITDA margins are 450bps higher than 2012. So not sure why you think their operating strategy is questionable.

 

Further, their capex is drastically being reduced after a 3-4 year period of network investment. The operating leverage has just started to show and will continue to progress in the future. Just look at how their margins are expanding. Capex has been elevated as a result of the investment cycle and will go down to mid/high teens in 2016, bumping up FCF by a lot. 

 

In addition, they just rolled out their 1Gbps service across their entire footprint, which will encourage customers to upgrade and thereby increase ARPU. They have little competition and little overlap with FiOS so this is pretty big for them. On top of that, they just announced a 10% price increase across ALL customers, which went live October 1st so this is not in 3Q numbers. On the call, CEO said October saw the highest number of new HSD subs in the last 15 months, so the price increases have gone over very well.

 

This puts run-rate EBITDA at around $340mm, and in 2016 should be around $360mm. At 10x, that would put the stock at $545, and that is before any share repurchases. Should do around $180mm in FCF, at a 5% yield that would put the stock around $600. On top of that you have potential take out, hopefully that doesn't come too soon though.

[dwy000]

No argument as to the direction that cable is headed over the long term.  But the rationale of intentionally pricing profitable customers off of your system doesn't make a lot of sense to me.  It's certainly in contrast to the model being followed by the Malone/Roberts of the cable world.

 

The basic infrastructure for provision of video and HSD to the home is one and the same so you're basically putting more revenue over the same wire.  As long as you can do it at positive margins why encourage people to leave as opposed to maximize the combined margin per customer (which is the model for the Charter/Comcasts of the world).  Getting rid of video and phone subs won't reduce capex by all that much. Even though the video margin is much lower, it's still very positive and helps support the capex costs.  For a business where volumes are pretty stagnant or declining and growth is largely coming from price increases, driving away existing profitable customers doesn't seem like a strong long term plan.

 

 

[frommi]

This puts run-rate EBITDA at around $340mm, and in 2016 should be around $360mm. At 10x, that would put the stock at $545, and that is before any share repurchases. Should do around $180mm in FCF, at a 5% yield that would put the stock around $600. On top of that you have potential take out, hopefully that doesn't come too soon though.

 

Did you factor in the price increase? According to cuyler the whole price increase will trickle down to EBITDA, so i currently calculate with ~230 million in FCF for 2016 (last q it was 46m*4+800m*10%*62%(revenue*price increase*taxrate) ). Any growth/market share gains because of the 1GBit option come on top of that. Maybe i am too optimistic, but this can easily be a double in 2016/2017.

 

For a business where volumes are pretty stagnant or declining and growth is largely coming from price increases, driving away existing profitable customers doesn't seem like a strong long term plan.

 

In the last presentation there are some charts where you see the growth of business services and residential data are in double digits. They are now at the inflection point where growth of these units overrules the decline of residential video/phone. It will take off in the next years and overall revenue will start growing again, when they can keep up the current pace. Nothing of that is discounted in the share price.

[mountboney]

Looks like the transition to Data from Video emphasis is playing out well. 4q run rate ebitda $350mm up significantly from last year. Market likes it.

[muscleman]

Does anyone find it strange that the account receivables is far less than account payables?

Other cable companys usually have the reverse.

[rishig]

Here's my Cable One presentation:

https://docs.google.com/presentation/d/12kFlqUAEY2OBHfWHgR66z8OBMU3f3Ne6bI7OuXKYvhU/edit#slide=id.g16686db087_0_157

 

My thoughts are not original, but would love to hear criticisms.

[muscleman]

Here's my Cable One presentation:

https://docs.google.com/presentation/d/12kFlqUAEY2OBHfWHgR66z8OBMU3f3Ne6bI7OuXKYvhU/edit#slide=id.g16686db087_0_157

 

My thoughts are not original, but would love to hear criticisms.

 

The P/FCF is 30x. Too expensive for a slow grower.

 

[cmlber]

Here's my Cable One presentation:

https://docs.google.com/presentation/d/12kFlqUAEY2OBHfWHgR66z8OBMU3f3Ne6bI7OuXKYvhU/edit#slide=id.g16686db087_0_157

 

My thoughts are not original, but would love to hear criticisms.

 

The P/FCF is 30x. Too expensive for a slow grower.

 

P/FCF is actually around 20x if you use a maintenance capex number.  They've been spending heavily recently to be able to offer 1gbps speeds. 

 

Also, it won't be a slow grower going forward, you're looking in the rear view mirror.  Growth will accelerate pretty rapidly.  The video business is declining and the Internet business is growing rapidly, so every year a larger percentage of the business is growing rapidly and a smaller part is declining.

 

Add to that the fact that they have barely any leverage and besides the usual opex synergies likely material revenue synergies for an acquirer and it's an obvious Charter or Altice takeout target. 

 

 

[rishig]

Here's my Cable One presentation:

https://docs.google.com/presentation/d/12kFlqUAEY2OBHfWHgR66z8OBMU3f3Ne6bI7OuXKYvhU/edit#slide=id.g16686db087_0_157

 

My thoughts are not original, but would love to hear criticisms.

 

The P/FCF is 30x. Too expensive for a slow grower.

 

P/FCF is actually around 20x if you use a maintenance capex number.  They've been spending heavily recently to be able to offer 1gbps speeds. 

 

Also, it won't be a slow grower going forward, you're looking in the rear view mirror.  Growth will accelerate pretty rapidly.  The video business is declining and the Internet business is growing rapidly, so every year a larger percentage of the business is growing rapidly and a smaller part is declining.

 

Add to that the fact that they have barely any leverage and besides the usual opex synergies likely material revenue synergies for an acquirer and it's an obvious Charter or Altice takeout target.

 

+1. Spot on.

[Munger_Disciple]

It is hard to see how CABO is a takeout target given its rich valuation (EV/EBITDA =10) and low growth. Presumably the acquirer has to pay a premium on top of this. If CABO is smart, they will use their high priced currency to acquire other smaller or similar size HSD providers that are trading at a lower valuation.

 

Also, Tom Rutledge at Charter is more optimistic about video business than Tom Might.

[rishig]

It is hard to see how CABO is a takeout target given its rich valuation (EV/EBITDA =10) and low growth. Presumably the acquirer has to pay a premium on top of this. If CABO is smart, they will use their high priced currency to acquire other smaller or similar size HSD providers that are trading at a lower valuation.

 

Also, Tom Rutledge at Charter is more optimistic about video business than Tom Might.

 

- I disagree on growth. Show me another cable company that grew EBITDA margins by 1000 bps in a little over 2 years. And they are finishing rollout on GIG in 2016.

- You are comparing apples (Cable One) to oranges (Charter). A mid sized MVPD cannot make money on video.

[cmlber]

It is hard to see how CABO is a takeout target given its rich valuation (EV/EBITDA =10) and low growth. Presumably the acquirer has to pay a premium on top of this. If CABO is smart, they will use their high priced currency to acquire other smaller or similar size HSD providers that are trading at a lower valuation.

 

Also, Tom Rutledge at Charter is more optimistic about video business than Tom Might.

 

You're arbitrarily deciding the valuation is "rich" because the multiple is higher than other cable companies.  High multiple does not always equal rich valuation.  CABO has much lower HSD pricing than peers, much lower HSD penetration, much lower fiber overlap than competitors, all rural markets so likely to stay much lower overlap, and has basically no video business. 

 

Again on the low growth, that is a fact of the past.  Video is a much smaller portion of the business and getting smaller and Internet is a much larger portion of the business and getting larger.  I can easily see mid to high single digit organic EBITDA growth for decades.

 

And the fact that Charter is much more optimistic about the video business is exactly my point.  They could get back the thousands of video subscribers that CABO shed by having a good video offering.  Revenue synergies would make it a more attractive target, all else equal.

[Packer16]

There are others making money on cable (SHEN being one that breaks out cable EBITDA) but I think the differentiation between video and HSI is not applicable as I have not yet seen a cable co that does not provide both.  The question in my mind is can the firm make an incremental profit by selling video over the HSI pipe? It sounds like no in CABO's case but yes in SHEN's case.

 

If CABO is in a growth phase you would want to project the growth and then apply a reasonable multiple to the ending EBITDA and discount it back.  It may be cheap but without a reasonable projection it is hard to tell.

 

Packer

[Munger_Disciple]

I disagree on growth. Show me another cable company that grew EBITDA margins by 1000 bps in a little over 2 years. And they are finishing rollout on GIG in 2016.

 

The reason EBITDA margins are improving is because they are walking away from video business. All the cable companies have great margins on HSD service, not just CABO. So this alone does not justify a high multiple.

 

You are comparing apples (Cable One) to oranges (Charter).

 

How is that so?? Both companies are in the same business. The only difference is scale, Charter is obviously much bigger.

 

A mid sized MVPD cannot make money on video.

 

Mediacom is not walking away from video (they are still making money on video just not as much as they do on HSD), so I would say the jury is still out on this.

[Munger_Disciple]

You're arbitrarily deciding the valuation is "rich" because the multiple is higher than other cable companies.  High multiple does not always equal rich valuation.

 

I am not arbitrarily defining the value as high. I am saying it is high compared to almost all US/Canadian cable companies.

 

If you think it is undervalued, what is your estimate of CABO's value? And why?

 

[racemize]

There are others making money on cable (SHEN being one that breaks out cable EBITDA) but I think the differentiation between video and HSI is not applicable as I have not yet seen a cable co that does not provide both.  The question in my mind is can the firm make an incremental profit by selling video over the HSI pipe? It sounds like no in CABO's case but yes in SHEN's case.

 

If CABO is in a growth phase you would want to project the growth and then apply a reasonable multiple to the ending EBITDA and discount it back.  It may be cheap but without a reasonable projection it is hard to tell.

 

Packer

 

Packer, any comments on your thoughts of CABO vs. say GNCMA?

[Munger_Disciple]

There are others making money on cable (SHEN being one that breaks out cable EBITDA) but I think the differentiation between video and HSI is not applicable as I have not yet seen a cable co that does not provide both.  The question in my mind is can the firm make an incremental profit by selling video over the HSI pipe? It sounds like no in CABO's case but yes in SHEN's case.

 

If CABO is in a growth phase you would want to project the growth and then apply a reasonable multiple to the ending EBITDA and discount it back.  It may be cheap but without a reasonable projection it is hard to tell.

 

Packer

 

+1

[Munger_Disciple]

Packer, any comments on your thoughts of CABO vs. say GNCMA?

 

I am not Packer, but here are my thoughts.

 

GNCMA is a lot cheaper than CABO IMHO. The main reason is that GNCMA is facing near term Alaska specific issues related to oil production and state budget. But I think this is unlikely to be a long term issue. On the flip side, since GNCMA is cutting back on growth capex, its FCF will dramatically improve over the next couple of years. CABO should use this opportunity and try to buy out General Comm. They would have to convince the super voting class B shareholders to pull this off. Unlike CABO, GNCMA is a quad-play provider which is a plus.

[cmlber]

You're arbitrarily deciding the valuation is "rich" because the multiple is higher than other cable companies.  High multiple does not always equal rich valuation.

 

I am not arbitrarily defining the value as high. I am saying it is high compared to almost all US/Canadian cable companies.

 

 

Have you taken the time to think through the growth drivers and estimate what free cash flow looks like over the next 20 years, and discounted back to the present at a reasonable discount rate?  If not, your valuation is arbitrary. 

 

Maybe you've done that and concluded 10x EBITDA is rich (if so, I take back the "arbitrary" comment and we can agree to disagree), but from your comment it sounded like you just thought the valuation was rich because the EBITDA multiple was higher than other cable companies.  Ferrari's EBITDA multiple is also a lot higher than other car companies, for obvious reasons.  Clearly that's a more extreme difference than in this case, but I think when you compare HSD price and penetration for CABO against other companies it is an extreme difference and it doesn't have the cord cutting risk that other cable companies have and has much lower fiber overlap risk which makes the terminal value significantly higher.

 

 

If you think it is undervalued, what is your estimate of CABO's value? And why?

 

 

You're getting a 4% unlevered FCF yield at this price.  Under very reasonable assumptions of HSD penetration, price increases, and package upgrades, CABO could grow EBITDA 6-7%/year for 20 years.  So I think you could see 10-11% compounding for a long time as a stand alone business at this price without the use of leverage.  Levering up at low rates to buy back stock you'll do a lot better.  And exiting at a premium given opex and revenue synergies for a buyer you'll do even better.  I think that's pretty attractive in this environment.

[cmlber]

Packer, any comments on your thoughts of CABO vs. say GNCMA?

 

I am not Packer, but here are my thoughts.

 

GNCMA is a lot cheaper than CABO IMHO. The main reason is that GNCMA is facing near term Alaska specific issues related to oil production and state budget. But I think this is unlikely to be a long term issue. On the flip side, since GNCMA is cutting back on growth capex, its FCF will dramatically improve over the next couple of years. CABO should use this opportunity and try to buy out General Comm. They would have to convince the super voting class B shareholders to pull this off. Unlike CABO, GNCMA is a quad-play provider which is a plus.

 

I haven't spent much time on GNCMA, after a quick look I didn't like the leverage and Alaska specific issues.  I can certainly see GNCMA equity doing better than CABO, but it's not hard to imagine scenarios where you can lose principal in GNCMA, can't think of any with CABO. 

 

But at a glance it does look cheap, so could definitely be an interesting takeover target for CABO.  They could finance the whole transaction with cheap debt and still have a reasonably conservative balance sheet.