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Cablevision Systems (CVC) $14.76
The Company:
Founded in 1973 by Charles “Chuck” Dolan, Cablevision Systems Corporation is a telecommunications and media company with a wide range of operations including advanced digital television, voice and high-speed Internet services, local media and programming properties, and movie theaters. Mr. Dolan was also the founder of HBO and a company called Sterling Manhattan that had wired most of Manhattan for cable TV back in the early 1970s. After losing money for several years, Mr. Dolan handed over his 20% stake in the company and control of HBO to Time Inc., which already owned 80% of Sterling Manhattan. He did manage to retain about 1,500 Long Island customers and managed to grow that into Cablevision, a company currently serving 3.1 million subscribers in the New York City area.
The company owns and operates cable systems serving homes in four Western states in addition to delivering its Optimum-branded cable, Internet, and voice offerings throughout the New York area. The company’s local media properties include News 12 Networks, MSG Varsity and Newsday Media Group. In addition, Cablevision owns and operates Clearview Cinemas. Cablevision has also been building out one of the largest Wi-Fi networks in the country with 35,000 locations and 1 million registered devices.
The company lost video subscribers in the fourth quarter of 2011 but has seen an increase in its high speed data and voice customers. In order to expand its footprint in the Western region, Cablevision acquired Bresnan Communications in December 2010, which was rebranded as Optimum West.
The year 2011 also saw the spinning off of Rainbow Media Holdings that became a separate public company named AMC Networks (AMCX) and Madison Square Garden that became a public company called Madison Square Garden Company (MSG) in June 2011.
The market appears to be valuing the company at a discount compared to its competitors and is also seeing it as a potential takeover target. However the company has been the subject of takeover offers and speculation for the better part of two decades and I don’t see how any suitor would be willing to acquire a company that has over $10 billion in net debt and negative stockholder equity.
On the surface, the company looked interesting trading at 6.5 times EBITDA, posting top line growth and sporting a dividend yield of 4.1%. The company is also buying back its stock. Following the 25,000 share insider purchase by a director last Thursday, I picked up some shares as indicated in the daily report on Friday and had an immediate 4% gain to show for it that day.
The more I dug into Cablevision over the weekend to write this weekly focus article, the less I liked the company. Besides the heavy debt load mentioned earlier, the negative shareholder equity and spurned takeover offers, the company also has two classes of stocks that effectively give the Dolan family full control of Cablevision. Each Class B share represents 10 votes vs. a single vote for each Class A share and the Dolan family controls all the non-public Class B shares.
While bankruptcy risk appears high, there have been several positive developments worth noting. The company had over $1.65 billion in debt that was coming due in the 2012-2014 time frame as you can see here on Morningstar but managed to refinance most of its short-term maturities through a term loan due in December 2016 and by issuing $1 billion in new debt that comes due in 2021.
Net debt decreased in 2011 partially because the company generated $583 million in free cash flow and partially because the company transferred debt to it’s spin-off AMC Networks (AMCX). Turnaround stocks can appreciate significantly but any glimmers of hope on account of these developments were overshadowed by the company’s forecast that free cash flow is expected to drop in 2012 on account of higher programming (content) costs and higher CapEx. The sudden and unexplained resignation of it’s well respected Chief Operating Officer Tom Rutledge (now the CEO of Charter Communications) was also a red flag. When an analyst asked management if they cared to comment on this resignation during the fourth quarter earnings call, all he received was a resounding “No”.
Business Statistics and Financials:
According to Cablevision’s fourth quarter 2011 results, free cash flow from continuing operations for the 12 months ended December 31, was $583 million or $2.05/share compared with the 2010 full year free cash flow of $536 million or $1.78/share, an increase of 8.7%. Average revenue per customer (ARPU) was $134.60 in the West, a $5 increase sequentially. ARPU across all regions was $154.10, a sequential increase of $2.39.
At year end, the company’s consolidated cash position was $612 million and net debt was $10.1 billion. The company repurchased approximately 4.6 million shares of Cablevision stock totalling $67.4 million during their stock repurchase program in the fourth quarter of 2011. This represents approximately 2% of the company’s outstanding Class A shares. By December 31, Cablevision had $144 million remaining under their existing repurchase program.
Competitors:
| Stock | Symbol | Mkt Cap | EV/EBIDTA | P/B | Operating Margin |
| Cablevision Systems Corporation | CVC | 4.12B | 6.55 | -0.71 | 18.43% |
| Comcast Corporation | CMCSA | 79.12B | 6.3 | 1.69 | 19.54% |
| Time Warner Cable Inc. | TWC | 24.80B | 6.61 | 3.31 | 21.34% |
| DIRECTV | DTV | 31.48B | 6.54 | -10.31 | 16.99% |
| DISH Network Corporation | DISH | 13.09B | 5.25 | -30.63 | 18.59% |
| AT&T Inc. | T | 183.02B | 8.02 | 1.72 | 9.57% |
| Verizon Communications Inc. | VZ | 109.65B | 4.27 | 3.03 | 16.99% |
Insider Buying:
Only one insider purchased stock on the open market over the last six months. Former COO Tom Rutledge exercised options in December and decided to hold on to the shares instead of turning around and selling them immediately.
| Owner | Relationship | Date | Cost | # Shares | Value($) | Total Shares |
| Rand Araskog | Director | Mar-01 | $14.26 | 25,000 | 356,455 | 132,565 |
Risk Factors:
Besides the various risk factors already mentioned in the latter half of “The Company” section above, another one worth mentioning is a drop in subscribers the company experienced in the third quarter of 2011 as the company faces stiff competition from Verizon’s fiber optic service called FiOS in its own backyard.
Conclusion:
Knowing which companies to avoid is probably as important if not more important that knowing which ones to buy when it comes to investing. The market reacted positively to this insider purchase bidding the stock up 4.6% on Friday in a market that ended in negative territory. On the surface, I liked the stock enough to pick it as the subject of our weekly focus article but as I dug deeper, I realized that the risks far outweigh the rewards with Cablevision.