What’s the business everyone loves to hate? Cable television! True, we tend to hate the service more than the stocks, but there’s plenty to hate about some cable stocks, too. Let’s have a look at Cablevision (NYSE:CVC), which gets tons of bad press thanks to its (arguably poor) management.
The company doesn’t merely own a cable system in the New York metropolitan area, it also owns an Internet service, local news networks, NSG Varsity Channel, the newspaper Newsday, and Star Community Publishing (weekly shopper publications). It operates the Clearview Cinemas chain, and recently spun off a suite of cable networks into another stock, AMC Networks (NASDAQ:AMCX).
Media empires can be quite lucrative. Just ask Rupert Murdoch. There always will be people to entertain. However, the trend toward Internet entertainment and streaming media is providing an historic challenge to companies like Cablevision. With television viewership migrating away from old-media outlets and the movie exhibition business suffering from a decade of high single-digit annual drops in admissions, there’s a lot to be concerned about. And although satellite providers are competing with cable networks, even that business has problems.
Add to this long-running complaints about the Dolan family, which controls Cablevision through a special class of stock, and one wonders why Cablevision should even be on any investor’s radar.
One has to look at financials before rendering any final decision.
Stock analysts peeking out five years see annualized earnings growth at an impressive 20%. At a stock price of $18 on FY 2011 earnings of $1.22, the stock presently trades at a P/E of 15. Time Warner Cable (NYSE:TWC) trades at a 13 P/E, Comcast (NASDAQ:CMCSA) at 17 and DirecTV (NASDAQ:DTV) at 14, so Cablevision is right in the middle.
Cable companies carry a lot of debt, and Cablevision is no exception. The company carries $630 million in cash, but is offset by a colossal $10 billion in debt, at an interest rate of about 7.9%. Trailing 12-month cash flow was $950 million, so the debt service is no problem. The company also had seven times the amount of free cash flow necessary to pay its 3.4% dividend.
ConclusionI have two concerns with Cablevision. The first is that the company has managed to push off some of its maturing debt from 2012 to 2015. Much of its remaining debt matures further out. Still, while cash flow is great, one must keep an eye on the ever-advancing threat of Internet content. The other issue is the Dolan family, known for its infighting.
Placing a 20 P/E on the company, with projected 2015 earnings of $2.64 per share gives us a price target of $52. Even if one were to knock that price target back significantly on the overall concerns, it is not inconceivable that Cablevision could double from its present price. I think Cablevision is a buy for regular accounts, but I’d be cautious as a retirement investor. If you own it, hold it, but don’t buy.
Lawrence Meyers does not own shares of Cablevision.
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