CABO - Cable One

[rogermunibond]

dwy00 - I think there are actually hundreds but they have small footprints and market share.

 

Besides CABO, WOW is still public - Mediacom went private recently, SuddenLink and RCN are private.  And a lot of the smaller providers are private.

 

https://decisiondata.org/list-of-cable-providers/

[Munger_Disciple]

dwy00 - I think there are actually hundreds but they have small footprints and market share.

 

Besides CABO, WOW is still public - Mediacom went private recently, SuddenLink and RCN are private.  And a lot of the smaller providers are private.

 

https://decisiondata.org/list-of-cable-providers/

 

SuddenLink is owned by Altice USA, a public company (Chairman Patrick Drahi).

 

[dwy000]

dwy00 - I think there are actually hundreds but they have small footprints and market share.

 

Besides CABO, WOW is still public - Mediacom went private recently, SuddenLink and RCN are private.  And a lot of the smaller providers are private.

 

https://decisiondata.org/list-of-cable-providers/

 

I believe WOW and RCN are primarily over builders focused on urban muti-dwelling units.

[Value92]

dwy00 - I think there are actually hundreds but they have small footprints and market share.

 

Besides CABO, WOW is still public - Mediacom went private recently, SuddenLink and RCN are private.  And a lot of the smaller providers are private.

 

https://decisiondata.org/list-of-cable-providers/

 

I believe WOW and RCN are primarily over builders focused on urban muti-dwelling units.

 

Medicaom is private but one can still get sec filings. Cox Communications is the other big private cable company. Atlantic Broadband was bought by Cogeco and one can get financials.

[wabuffo]

I'd argue CHTR should have a higher multiple than CABO. CABO's thesis is that internet is a better business and more profitable. They've abandoned selling TV because it's breakeven at best and they suggest internet only generates more FCF than internet and TV. If you believe CABO is right, you're likely better off buying CHTR. There's nothing that prevents CHTR from replicating CABO's strategy. In that case, you're paying a lower multiple for CHTR with significantly more FCF upside as they shed the TV business. Also, cable is a scale game and CHTR is significantly larger than CABO.

 

I own both CHTR and CABO - and I like them both for different reasons.  But one area of opportunity for both of them is that they are ready to take the foot of the capital spending accelerator after recent upgrading of their networks.  Its interesting to compare annual capex spending as a % of revenue for the public cablecos:

 

Comcast:    14.0%

Charter:    20.9%

Altice USA: 12.1%

Cable One:  20.3%

MediaCom:  16.2%

 

If Charter ramps down capex to an industry average of, say, 15% of revenue, that's worth $2.6B in annual free cash flow improvement.  Cable One is smaller, but setting capex at 15% of revenue, that would improve free cash flow by $56.9m annually.

 

I think CABO is more than fully valued but likely to continue to be acquisitive using cash/debt.  CHTR is more attractive to me because they will be ramping up free cash flow in the coming years and continuing to buy back stock.  I thought Munger_Disciple put it best, CABO prefers to buy other smaller cablecos at 9x EBITDA while CHTR prefers to buy its own stock at 9x EBITDA.  Both strategies make sense.

 

FWIW,

wabuffo

 

[vince]

I'd argue CHTR should have a higher multiple than CABO. CABO's thesis is that internet is a better business and more profitable. They've abandoned selling TV because it's breakeven at best and they suggest internet only generates more FCF than internet and TV. If you believe CABO is right, you're likely better off buying CHTR. There's nothing that prevents CHTR from replicating CABO's strategy. In that case, you're paying a lower multiple for CHTR with significantly more FCF upside as they shed the TV business. Also, cable is a scale game and CHTR is significantly larger than CABO.

 

I own both CHTR and CABO - and I like them both for different reasons.  But one area of opportunity for both of them is that they are ready to take the foot of the capital spending accelerator after recent upgrading of their networks.  Its interesting to compare annual capex spending as a % of revenue for the public cablecos:

 

Comcast:    14.0%

Charter:    20.9%

Altice USA: 12.1%

Cable One:  20.3%

MediaCom:  16.2%

 

If Charter ramps down capex to an industry average of, say, 15% of revenue, that's worth $2.6B in annual free cash flow improvement.  Cable One is smaller, but setting capex at 15% of revenue, that would improve free cash flow by $56.9m annually.

 

I think CABO is more than fully valued but likely to continue to be acquisitive using cash/debt.  CHTR is more attractive to me because they will be ramping up free cash flow in the coming years and continuing to buy back stock.  I thought Munger_Disciple put it best, CABO prefers to buy other smaller cablecos at 9x EBITDA while CHTR prefers to buy its own stock at 9x EBITDA.  Both strategies make sense.

 

FWIW,

wabuffo

 

Like the post, I have owned large positions in both for a few years.  I would be careful though assuming that Cabo's capex will fall into that 15% range, mgmt has made it fairly clear that their current %'s are probably run rate (oddly, I can't remember the reason even though I had it set in my mind 8-9 months ago when CFO responded to analyst questions).  However, Charter and Comcast have been stating confidently that their %'s are likely to keep falling towards 10%.  That may sound like good news and the market will most certainly like it but I believe Chtr CFO recently stated that means less internal high return projects.  Crazy but I have never really dug in to try and figure out what % of Chtr's capex is truly maintenance.  Most of the companies break their capex into 4-5 categories which would help when trying to come up with an estimate.

[Value92]

I'd argue CHTR should have a higher multiple than CABO. CABO's thesis is that internet is a better business and more profitable. They've abandoned selling TV because it's breakeven at best and they suggest internet only generates more FCF than internet and TV. If you believe CABO is right, you're likely better off buying CHTR. There's nothing that prevents CHTR from replicating CABO's strategy. In that case, you're paying a lower multiple for CHTR with significantly more FCF upside as they shed the TV business. Also, cable is a scale game and CHTR is significantly larger than CABO.

 

I own both CHTR and CABO - and I like them both for different reasons.  But one area of opportunity for both of them is that they are ready to take the foot of the capital spending accelerator after recent upgrading of their networks.  Its interesting to compare annual capex spending as a % of revenue for the public cablecos:

 

Comcast:    14.0%

Charter:    20.9%

Altice USA: 12.1%

Cable One:  20.3%

MediaCom:  16.2%

 

If Charter ramps down capex to an industry average of, say, 15% of revenue, that's worth $2.6B in annual free cash flow improvement.  Cable One is smaller, but setting capex at 15% of revenue, that would improve free cash flow by $56.9m annually.

 

I think CABO is more than fully valued but likely to continue to be acquisitive using cash/debt.  CHTR is more attractive to me because they will be ramping up free cash flow in the coming years and continuing to buy back stock.  I thought Munger_Disciple put it best, CABO prefers to buy other smaller cablecos at 9x EBITDA while CHTR prefers to buy its own stock at 9x EBITDA.  Both strategies make sense.

 

FWIW,

wabuffo

 

Like the post, I have owned large positions in both for a few years.  I would be careful though assuming that Cabo's capex will fall into that 15% range, mgmt has made it fairly clear that their current %'s are probably run rate (oddly, I can't remember the reason even though I had it set in my mind 8-9 months ago when CFO responded to analyst questions).  However, Charter and Comcast have been stating confidently that their %'s are likely to keep falling towards 10%.  That may sound like good news and the market will most certainly like it but I believe Chtr CFO recently stated that means less internal high return projects.  Crazy but I have never really dug in to try and figure out what % of Chtr's capex is truly maintenance.  Most of the companies break their capex into 4-5 categories which would help when trying to come up with an estimate.

 

I agree with your posts in the short-term. In the mid- to long-term I think you should assume higher Capex as there will be a need to upgrade the networks for even higher speeds as data usage continues to grow. That will drive higher penetration rates but Capex will be higher.

[vince]

I'd argue CHTR should have a higher multiple than CABO. CABO's thesis is that internet is a better business and more profitable. They've abandoned selling TV because it's breakeven at best and they suggest internet only generates more FCF than internet and TV. If you believe CABO is right, you're likely better off buying CHTR. There's nothing that prevents CHTR from replicating CABO's strategy. In that case, you're paying a lower multiple for CHTR with significantly more FCF upside as they shed the TV business. Also, cable is a scale game and CHTR is significantly larger than CABO.

 

I own both CHTR and CABO - and I like them both for different reasons.  But one area of opportunity for both of them is that they are ready to take the foot of the capital spending accelerator after recent upgrading of their networks.  Its interesting to compare annual capex spending as a % of revenue for the public cablecos:

 

Comcast:    14.0%

Charter:    20.9%

Altice USA: 12.1%

Cable One:  20.3%

MediaCom:  16.2%

 

If Charter ramps down capex to an industry average of, say, 15% of revenue, that's worth $2.6B in annual free cash flow improvement.  Cable One is smaller, but setting capex at 15% of revenue, that would improve free cash flow by $56.9m annually.

 

I think CABO is more than fully valued but likely to continue to be acquisitive using cash/debt.  CHTR is more attractive to me because they will be ramping up free cash flow in the coming years and continuing to buy back stock.  I thought Munger_Disciple put it best, CABO prefers to buy other smaller cablecos at 9x EBITDA while CHTR prefers to buy its own stock at 9x EBITDA.  Both strategies make sense.

 

FWIW,

wabuffo

 

Like the post, I have owned large positions in both for a few years.  I would be careful though assuming that Cabo's capex will fall into that 15% range, mgmt has made it fairly clear that their current %'s are probably run rate (oddly, I can't remember the reason even though I had it set in my mind 8-9 months ago when CFO responded to analyst questions).  However, Charter and Comcast have been stating confidently that their %'s are likely to keep falling towards 10%.  That may sound like good news and the market will most certainly like it but I believe Chtr CFO recently stated that means less internal high return projects.  Crazy but I have never really dug in to try and figure out what % of Chtr's capex is truly maintenance.  Most of the companies break their capex into 4-5 categories which would help when trying to come up with an estimate.

 

I agree with your posts in the short-term. In the mid- to long-term I think you should assume higher Capex as there will be a need to upgrade the networks for even higher speeds as data usage continues to grow. That will drive higher penetration rates but Capex will be higher.

 

I respectfully disagree.  There are multiple reasons why capex will be lower with lower video sales and higher data sales, with video boxes being one of them.  In addition their cost per premise to get to 10 gig are very very reasonable and it looks like 25 gig will probably be similar.  If you mean 8-10 years out, then I would tend to agree with you more.... but hey it's just an educated guess and it will probably be good capital anyway

[wabuffo]

I respectfully disagree.  There are multiple reasons why capex will be lower with lower video sales and higher data sales, with video boxes being one of them.  In addition their cost per premise to get to 10 gig are very very reasonable and it looks like 25 gig will probably be similar.  If you mean 8-10 years out, then I would tend to agree with you more.... but hey it's just an educated guess and it will probably be good capital anyway

 

I agree with Vince.  There are basically three broad buckets of capex spending for the cableco's.

 

1) Customer Premise Equipment (think cable boxes, but also cable modems)

2) Infrastructure/Line Extensions (network cabling, line to home/business)

3) Support/Other (this is stuff like enterprise systems - eg. customer billing systems, etc).

 

Here is how each public cableco compares for the latest full year (2018) capex category as a % of revenue:

CAPEX CATEGORY                    COMCAST    CHARTER    ALTICE US    CABLE ONE  MEDIACOM

Customer Premise Equip.            5.3%      7.2%        3.9%        5.3%      7.3%

Infrastructure/Line Ext.            7.3%      8.3%        4.1%        5.8%      4.0%

Support/Other                      1.4%      5.5%        4.1%        9.2%      4.9%

TOTAL:                            15.0%      20.9%      12.1%        20.3%      16.2%

 

One can overanalyze these breakdowns, but its clear that Charter is playing catch-up in all three categories as it upgrades its network and video boxes in order to maximize consumer pricing/value.  It also is spending in things like enterprise systems to integrate the various opcos.    In CABO's case, they are clearly spending on systems to integrate their acquisitions into one customer billing system.  Over time as CABO reaches its ultimate size, that category of spending should decline significantly.

 

Over the longer term for cableco's as a class, category 3 should decline.  Perhaps category 2 stays the same or goes up.  But I think category 1 goes down as well as video subs decline since most of that capex is cable boxes.  Of course, the wildcard would be an aggressive entry by the major cableco's into wireless telephony - but that's an investment into a whole other business. 

 

wabuffo

 

 

[Munger_Disciple]

 

I agree with Vince.  There are basically three broad buckets of capex spending for the cableco's.

 

1) Customer Premise Equipment (think cable boxes, but also cable modems)

2) Infrastructure/Line Extensions (network cabling, line to home/business)

3) Support/Other (this is stuff like enterprise systems - eg. customer billing systems, etc).

 

Here is how each public cableco compares for the latest full year (2018) capex category as a % of revenue:

CAPEX CATEGORY                    COMCAST    CHARTER    ALTICE US    CABLE ONE  MEDIACOM

Customer Premise Equip.            5.3%      7.2%        3.9%        5.3%      7.3%

Infrastructure/Line Ext.            7.3%      8.3%        4.1%        5.8%      4.0%

Support/Other                      1.4%      5.5%        4.1%        9.2%      4.9%

TOTAL:                            15.0%      20.9%      12.1%        20.3%      16.2%

 

One can overanalyze these breakdowns, but its clear that Charter is playing catch-up in all three categories as it upgrades its network and video boxes in order to maximize consumer pricing/value.  It also is spending in things like enterprise systems to integrate the various opcos.    In CABO's case, they are clearly spending on systems to integrate their acquisitions into one customer billing system.  Over time as CABO reaches its ultimate size, that category of spending should decline significantly.

 

Over the longer term for cableco's as a class, category 3 should decline.  Perhaps category 2 stays the same or goes up.  But I think category 1 goes down as well as video subs decline since most of that capex is cable boxes.  Of course, the wildcard would be an aggressive entry by the major cableco's into wireless telephony - but that's an investment into a whole other business. 

 

wabuffo

 

 

wabuffo,

 

Charter capex numbers seem off to me. Looking at Q2-2019 trending schedule, cable capex (ex. mobile) during the first half of 2019 was $3.081B and the CFO guided to $7B number for all of 2019. He also said $4B for the rest of the year would be a hard number to spend so the actual capex could come in a little less than $7B. Assuming $11B quarterly run rate for revenue ex-mobile, capex as a percentage of sales in 2019 would come to  15.9%.

 

I agree with general premise that capex as % of revenue should come down for Charter/CABO over time.

 

-MD

2Q19_TrendingSchedule.pdf

[vince]

 

I agree with Vince.  There are basically three broad buckets of capex spending for the cableco's.

 

1) Customer Premise Equipment (think cable boxes, but also cable modems)

2) Infrastructure/Line Extensions (network cabling, line to home/business)

3) Support/Other (this is stuff like enterprise systems - eg. customer billing systems, etc).

 

Here is how each public cableco compares for the latest full year (2018) capex category as a % of revenue:

CAPEX CATEGORY                    COMCAST    CHARTER    ALTICE US    CABLE ONE  MEDIACOM

Customer Premise Equip.            5.3%      7.2%        3.9%        5.3%      7.3%

Infrastructure/Line Ext.            7.3%      8.3%        4.1%        5.8%      4.0%

Support/Other                      1.4%      5.5%        4.1%        9.2%      4.9%

TOTAL:                            15.0%      20.9%      12.1%        20.3%      16.2%

 

One can overanalyze these breakdowns, but its clear that Charter is playing catch-up in all three categories as it upgrades its network and video boxes in order to maximize consumer pricing/value.  It also is spending in things like enterprise systems to integrate the various opcos.    In CABO's case, they are clearly spending on systems to integrate their acquisitions into one customer billing system.  Over time as CABO reaches its ultimate size, that category of spending should decline significantly.

 

Over the longer term for cableco's as a class, category 3 should decline.  Perhaps category 2 stays the same or goes up.  But I think category 1 goes down as well as video subs decline since most of that capex is cable boxes.  Of course, the wildcard would be an aggressive entry by the major cableco's into wireless telephony - but that's an investment into a whole other business. 

 

wabuffo

 

 

wabuffo,

 

Charter capex numbers seem off to me. Looking at Q2-2019 trending schedule, cable capex (ex. mobile) during the first half of 2019 was $3.081B and the CFO guided to $7B number for all of 2019. He also said $4B for the rest of the year would be a hard number to spend so the actual capex could come in a little less than $7B. Assuming $11B quarterly run rate for revenue ex-mobile, capex as a percentage of sales in 2019 would come to  15.9%.

 

I agree with general premise that capex as % of revenue should come down for Charter/CABO over time.

 

-MD

 

It turns out that you are both right.  Chtr spent 9 billion last year but is guiding to a significant reduction (integration is finishing up) to 7 billion this year.  It's also telling that they won't even reach 7 billion this year despite trying.  I think the cable companies are actively trying to get capex up because they are well aware the possible backlash they could face from the public and regulators if the business shows it's true potential.  Ebitda margins are going to keep rising because of increased efficiencies creeping into the model (self install) and free cash flow margins are going to continue rising from shrinking capex.  Imagine what Chtr's financials will look like once fully integrated while closing some of the gap in pricing.

[wabuffo]

Charter capex numbers seem off to me

 

I took the numbers from the 2018 10-K.  Revenues = $43,634  Capex = $9,125  Capex/Revenue = 9125/43634 = .209  What part looks off to you?

 

I used full-year 2018 numbers for all of the Cablecos (note that Mediacom's y-e is Sept 2018).

 

wabuffo

[rogermunibond]

The beauty of Docsis 3.1 is that you don't really need to spend that much more to get to gigabit speeds.

 

I live in an area where Verizon Fios and Comcast are both operating.  It's a real boon because that keeps a lid on broadband and payTV prices.  Downside for me is that I'm currently with Fios and if I want to get higher than 150 Mbps speed I'll need to convert the inside of the house from coax to fiber.  I won't need to do this with Comcast.

 

I'd argue CHTR should have a higher multiple than CABO. CABO's thesis is that internet is a better business and more profitable. They've abandoned selling TV because it's breakeven at best and they suggest internet only generates more FCF than internet and TV. If you believe CABO is right, you're likely better off buying CHTR. There's nothing that prevents CHTR from replicating CABO's strategy. In that case, you're paying a lower multiple for CHTR with significantly more FCF upside as they shed the TV business. Also, cable is a scale game and CHTR is significantly larger than CABO.

 

I own both CHTR and CABO - and I like them both for different reasons.  But one area of opportunity for both of them is that they are ready to take the foot of the capital spending accelerator after recent upgrading of their networks.  Its interesting to compare annual capex spending as a % of revenue for the public cablecos:

 

Comcast:    14.0%

Charter:    20.9%

Altice USA: 12.1%

Cable One:  20.3%

MediaCom:  16.2%

 

If Charter ramps down capex to an industry average of, say, 15% of revenue, that's worth $2.6B in annual free cash flow improvement.  Cable One is smaller, but setting capex at 15% of revenue, that would improve free cash flow by $56.9m annually.

 

I think CABO is more than fully valued but likely to continue to be acquisitive using cash/debt.  CHTR is more attractive to me because they will be ramping up free cash flow in the coming years and continuing to buy back stock.  I thought Munger_Disciple put it best, CABO prefers to buy other smaller cablecos at 9x EBITDA while CHTR prefers to buy its own stock at 9x EBITDA.  Both strategies make sense.

 

FWIW,

wabuffo

 

Like the post, I have owned large positions in both for a few years.  I would be careful though assuming that Cabo's capex will fall into that 15% range, mgmt has made it fairly clear that their current %'s are probably run rate (oddly, I can't remember the reason even though I had it set in my mind 8-9 months ago when CFO responded to analyst questions).  However, Charter and Comcast have been stating confidently that their %'s are likely to keep falling towards 10%.  That may sound like good news and the market will most certainly like it but I believe Chtr CFO recently stated that means less internal high return projects.  Crazy but I have never really dug in to try and figure out what % of Chtr's capex is truly maintenance.  Most of the companies break their capex into 4-5 categories which would help when trying to come up with an estimate.

 

I agree with your posts in the short-term. In the mid- to long-term I think you should assume higher Capex as there will be a need to upgrade the networks for even higher speeds as data usage continues to grow. That will drive higher penetration rates but Capex will be higher.

[Munger_Disciple]

Charter capex numbers seem off to me

 

I took the numbers from the 2018 10-K.  Revenues = $43,634  Capex = $9,125  Capex/Revenue = 9125/43634 = .209  What part looks off to you?

 

I used full-year 2018 numbers for all of the Cablecos (note that Mediacom's y-e is Sept 2018).

 

wabuffo

 

Sorry my mistake; missed the part about 2018. Your numbers are correct as shown for 2018. However the capex intensity has already come by 500bps in 2019. So the 2018 numbers are not representative of capex for 2019 & beyond as they include all the merger related costs for upgrade of old cable systems & unifying billing etc.   

[Value92]

The beauty of Docsis 3.1 is that you don't really need to spend that much more to get to gigabit speeds.

 

I live in an area where Verizon Fios and Comcast are both operating.  It's a real boon because that keeps a lid on broadband and payTV prices.  Downside for me is that I'm currently with Fios and if I want to get higher than 150 Mbps speed I'll need to convert the inside of the house from coax to fiber.  I won't need to do this with Comcast.

 

I'd argue CHTR should have a higher multiple than CABO. CABO's thesis is that internet is a better business and more profitable. They've abandoned selling TV because it's breakeven at best and they suggest internet only generates more FCF than internet and TV. If you believe CABO is right, you're likely better off buying CHTR. There's nothing that prevents CHTR from replicating CABO's strategy. In that case, you're paying a lower multiple for CHTR with significantly more FCF upside as they shed the TV business. Also, cable is a scale game and CHTR is significantly larger than CABO.

 

I own both CHTR and CABO - and I like them both for different reasons.  But one area of opportunity for both of them is that they are ready to take the foot of the capital spending accelerator after recent upgrading of their networks.  Its interesting to compare annual capex spending as a % of revenue for the public cablecos:

 

Comcast:    14.0%

Charter:    20.9%

Altice USA: 12.1%

Cable One:  20.3%

MediaCom:  16.2%

 

If Charter ramps down capex to an industry average of, say, 15% of revenue, that's worth $2.6B in annual free cash flow improvement.  Cable One is smaller, but setting capex at 15% of revenue, that would improve free cash flow by $56.9m annually.

 

I think CABO is more than fully valued but likely to continue to be acquisitive using cash/debt.  CHTR is more attractive to me because they will be ramping up free cash flow in the coming years and continuing to buy back stock.  I thought Munger_Disciple put it best, CABO prefers to buy other smaller cablecos at 9x EBITDA while CHTR prefers to buy its own stock at 9x EBITDA.  Both strategies make sense.

 

FWIW,

wabuffo

 

Like the post, I have owned large positions in both for a few years.  I would be careful though assuming that Cabo's capex will fall into that 15% range, mgmt has made it fairly clear that their current %'s are probably run rate (oddly, I can't remember the reason even though I had it set in my mind 8-9 months ago when CFO responded to analyst questions).  However, Charter and Comcast have been stating confidently that their %'s are likely to keep falling towards 10%.  That may sound like good news and the market will most certainly like it but I believe Chtr CFO recently stated that means less internal high return projects.  Crazy but I have never really dug in to try and figure out what % of Chtr's capex is truly maintenance.  Most of the companies break their capex into 4-5 categories which would help when trying to come up with an estimate.

 

I agree with your posts in the short-term. In the mid- to long-term I think you should assume higher Capex as there will be a need to upgrade the networks for even higher speeds as data usage continues to grow. That will drive higher penetration rates but Capex will be higher.

 

As described in the Malone biography Cable Cowboy I always like to ask the question: if not?

 

After reading Fiber by Susan Crawford and talking to people from the industry I think it is clear that fiber is a much better product than cable. The quality of the coax connection get worse as more people use the same connection. So an advertised 1 gig fiber product is a better product than 1 gig coax product. So if worst comes to worst and people feel this difference how fast and at what cost do you think CABO and the other guys can lay fiber and future proof their networks?

 

In the UK Liberty Global has switched from laying coax to laying fiber. Altice is currently laying fiber in the US.

 

Just want to be sure that their is no terminal value risk. That would be quite bad by those debt loads...

 

Some overbuilders get much higher penetration rates on their new buids than FiOS got in earlier times. So what changed?

[rogermunibond]

They're all using HFC (hybrid fiber coax) networks.  Fiber to the cable head-end or neighborhood and then coax to the home.

[wabuffo]

Great earnings report from CABO.  Though to be fair, a lot of optimism was/is already priced into the stock.

 

wabuffo

[vince]

The beauty of Docsis 3.1 is that you don't really need to spend that much more to get to gigabit speeds.

 

I live in an area where Verizon Fios and Comcast are both operating.  It's a real boon because that keeps a lid on broadband and payTV prices.  Downside for me is that I'm currently with Fios and if I want to get higher than 150 Mbps speed I'll need to convert the inside of the house from coax to fiber.  I won't need to do this with Comcast.

 

I'd argue CHTR should have a higher multiple than CABO. CABO's thesis is that internet is a better business and more profitable. They've abandoned selling TV because it's breakeven at best and they suggest internet only generates more FCF than internet and TV. If you believe CABO is right, you're likely better off buying CHTR. There's nothing that prevents CHTR from replicating CABO's strategy. In that case, you're paying a lower multiple for CHTR with significantly more FCF upside as they shed the TV business. Also, cable is a scale game and CHTR is significantly larger than CABO.

 

I own both CHTR and CABO - and I like them both for different reasons.  But one area of opportunity for both of them is that they are ready to take the foot of the capital spending accelerator after recent upgrading of their networks.  Its interesting to compare annual capex spending as a % of revenue for the public cablecos:

 

Comcast:    14.0%

Charter:    20.9%

Altice USA: 12.1%

Cable One:  20.3%

MediaCom:  16.2%

 

If Charter ramps down capex to an industry average of, say, 15% of revenue, that's worth $2.6B in annual free cash flow improvement.  Cable One is smaller, but setting capex at 15% of revenue, that would improve free cash flow by $56.9m annually.

 

I think CABO is more than fully valued but likely to continue to be acquisitive using cash/debt.  CHTR is more attractive to me because they will be ramping up free cash flow in the coming years and continuing to buy back stock.  I thought Munger_Disciple put it best, CABO prefers to buy other smaller cablecos at 9x EBITDA while CHTR prefers to buy its own stock at 9x EBITDA.  Both strategies make sense.

 

FWIW,

wabuffo

 

Like the post, I have owned large positions in both for a few years.  I would be careful though assuming that Cabo's capex will fall into that 15% range, mgmt has made it fairly clear that their current %'s are probably run rate (oddly, I can't remember the reason even though I had it set in my mind 8-9 months ago when CFO responded to analyst questions).  However, Charter and Comcast have been stating confidently that their %'s are likely to keep falling towards 10%.  That may sound like good news and the market will most certainly like it but I believe Chtr CFO recently stated that means less internal high return projects.  Crazy but I have never really dug in to try and figure out what % of Chtr's capex is truly maintenance.  Most of the companies break their capex into 4-5 categories which would help when trying to come up with an estimate.

 

I agree with your posts in the short-term. In the mid- to long-term I think you should assume higher Capex as there will be a need to upgrade the networks for even higher speeds as data usage continues to grow. That will drive higher penetration rates but Capex will be higher.

 

As described in the Malone biography Cable Cowboy I always like to ask the question: if not?

 

After reading Fiber by Susan Crawford and talking to people from the industry I think it is clear that fiber is a much better product than cable. The quality of the coax connection get worse as more people use the same connection. So an advertised 1 gig fiber product is a better product than 1 gig coax product. So if worst comes to worst and people feel this difference how fast and at what cost do you think CABO and the other guys can lay fiber and future proof their networks?

 

In the UK Liberty Global has switched from laying coax to laying fiber. Altice is currently laying fiber in the US.

 

Just want to be sure that their is no terminal value risk. That would be quite bad by those debt loads...

 

Some overbuilders get much higher penetration rates on their new buids than FiOS got in earlier times. So what changed?

 

Fiber may be better in terms of performance but not even close when you consider cost/performance.  Liberty Global and most others lay fiber for new build but mostly continue to upgrade the existing plant.  There is no way to be sure of no terminal value risk, it's probabilistic.  And I would say, from what is generally known currently, that cable is in pole position for whatever infrastructure threat (again, the ones that are generally known).  That doesn't mean their asset value cannot be impaired by irrational competitors, but that is the case for almost any business in any industry.  Cable is well positioned.

[vince]

After reading the CC transcript I have come to the conclusion that the major reason for the seemingly overvaluation (this puppy is 30 times free cash flow and getting more expensive almost daily) is the belief that Cabo will be able to continue gobbling up smaller cable operators and extract value in the same way as the old cable cowboys.  And even though I can understand how predictable synergies are in horizontal cable tie-ups, they now have to find them, and execute to support the valuation. That's a story far removed from when you could purchase them at 630 a share less than 2 years ago.

[wabuffo]

The quarterly results were excellent and they are BEFORE the closure of the Fidelity acquisition which took place Oct 1st.  Fidelity generates $47m of EBITDA and will deliver another $15m in operational synergy when merged into CABO.  So $62m for $526m in cash and debt (8.5 EV/EBITDA) is very accretive when interest rates are this low. 

 

The thesis originally after CABO was spun out of Washington Post in 2015 (@ $324 per share) was that it was going to be acquired.  Instead, they have been making accretive tuck-in acquisitions without any dilution to existing shareholders.  They will probably continue to do this but ultimately, I think CABO itself gets acquired by one of the big boys (probably ATUS) for a healthy premium as well if interest rates continue to stay low. 

 

It looks expensive but my thesis is that this stock carries two premia - 1) for further tuck-in acquisitions, and 2) a final liquidity premium when CABO itself gets taken out.

 

wabuffo

[rogermunibond]

Does it make sense for Cox or Mediacom to look at CABO?

 

 

[wabuffo]

Does it make sense for Cox or Mediacom to look at CABO?

 

I think both of these ownership groups probably are looking for exits.  Mediacom, in particular, has been for sale for years but asking price is ridiculously high.  I think ATUS needs to reduce debt - but once it does, it will be looking to roll-up more cablecos.

 

wabuffo

[Munger_Disciple]

https://finance.yahoo.com/news/cable-one-announces-pricing-upsized-004900676.html

 

Cable One selling stock at a bleeding edge multiple of 18-19 times EBITDA.

[Munger_Disciple]

I think this is a smart move by CABO. The sellers of cable properties don't want CABO's inflated stock. They prefer cash. So CABO is selling stock to "public" shareholders and will likely use the cash for acquisitions. Thus this can be viewed as CABO indirectly using its high stock price to buy other cable cos. 

[jgyetzer]

I've owned this for several years and although I dislike dilution, I think this reflects smart capital allocation.  There are small rollup opportunities still available.