|Shares Out. (in M):||6||P/E||0||0|
|Market Cap (in $M):||2,300||P/FCF||0||0|
|Net Debt (in $M):||450||EBIT||0||0|
Underfollowed, misunderstood and catalyst-rich spin-off that I expect to repurchase 25-45% of its shares (30-50% of its float) and generate a 60-100% total return to shareholders in next 2-3 years while assuming only 6% annual EBITDA growth, and assuming repurchases made at increasing share prices over that timeframe. If they can grow EBITDA a couple points faster, which I believe is quite likely given strong pricing power and customer speed upgrades, total 2-3 year return to shareholders could exceed 100% from here. Expect ultimate sale of company to Charter/Liberty, Comcast, Altice or other larger cable provider, which, contrary to popular opinion, can almost certainly be done at any time due to preservation of the “super safe harbor” exemption as essentially confirmed by recent CFO comment. Importantly, I see a low probability of capital loss from this extremely attractive price.
Based in Phoenix, AZ, Cable One, Inc. (“CABO”) is the 10th largest cable company in the U.S., and focused on non-urban markets in 19 Midwestern, Southern and Western States. 75% of the company’s customers are in 5 states (Mississippi, Idaho, Oklahoma, Texas, Arizona) where competition is extremely limited (<1% of customers have access to fiber-to-the-home). The stock’s current dividend yield is 1.5%.
Formerly part of Graham Holdings Company (“GHC”), CABO completed its full separation via a spin-off completed 3 weeks ago, on July 1st. Concurrent with the spin, the company raised $550mm of debt to finance a $450mm dividend to GHC and put $100mm of cash on its opening balance sheet. With 5.8mm shares outstanding (4.8mm floating excluding Graham family), the market cap is $3.2bn and enterprise value is $2.7bn, equal to 9.0x LTM EBITDA.
* Side note: I have a Stub GHC writeup half-written, but given current cable industry dynamics, and fact that CABO has not been posted on VIC, SZ or otherwise, I figured I’d post this first and Stub GHC next. I love both parts of pre-spin GHC here, for many similar, and some different, reasons. *
Keys to the Thesis:
* Underfollowed: Only one analyst covering (JPM initiated with a “Hold” and $476 target and $529 potential takeout price when stock was $425); high absolute share price of $390 and low trading volume makes shares unprofitable for sellside firms; notably the company's data is not even properly reflected in Capital IQ yet
* Misunderstood tax law: Market likely is mistaken in its belief that there is a 2-year M&A embargo required post-spin for sale event, but I am quite certain CABO has been careful to avoid prior M&A discussion or “plan,” qualifying them for “super safe harbor” exemption (Motorola Mobility/Google 2011, Realogy/Apollo 2006-7, First Data/Western Union/KKR 2007 are examples); GHC/CABO management are extremely tax savvy, as evidenced by their recent stock swap with Berkshire; to that end, CABO CFO recently said “There is a lot of consolidation activity in the industry we have not had any discussions with anybody”
* Spin-off dynamics: Shares have traded down 12% in 3 weeks from $450 initial price post-spin to $394 currently
* Minimal competition: Non-urban market focus with minimal high speed internet competition (75% of customers in MS, ID, OK, TX, AZ)
* Expanding margins: Conscious focus on high speed data (internet) and business customers, running declining video business for cash
* Focus on FCF: “Offer premium product at premium price” (100 Mbps internet by Jan 2016)
* Recurring revenue: Subscription business with 92% renewal rate in high speed data
* Price increases: Large price increase potential (currently charges $1.86/Mbps vs. comps as high as $2.89/Mbps), 21% below Cox, 22% below Comcast, 25% below Mediacom and 35% below Suddenlink
* Underleveraged (but not for long!): Current gross leverage of 1.8x (1.5x net) at 5.0% weighted cost with 6.6 year average maturity (term A at 2020, senior notes at 2022), targeted to rise to 3.0-4.0x (conservative by Malone standards of 5.0x+) with no material acquisitions expected
* Huge levered buyback likely: At 3.0x gross leverage and 6% EBITDA growth, could repurchase 27% of total shares and 33% of float as the share price rises to nearly $630 by 2018 (*note that there is circularity here, because if share price does not rise consistently over time, share repurchases will be higher). It is generally thought that there is a 20% limit on share repos in the first 2 years after a spin, although it may be up to 50% for a “widely-held” stock
* Dividend: $6/share dividend is 1.5% current yield
* Declining capex: “Capex cycle materially over by 2015” per management, drives significant additional increases in FCF beyond EBITDA growth
* Small float: Only 4.8mm shares float, as Graham Family owns 17% of the stock, unlikely to be sellers in open market (Don Graham has committed to personally not selling any stock in open market for at least 2 years); “true float” probably no more than 3.5mm shares due to index funds and long-term holders (e.g. Southeastern Asset Management), but my modeled float simply deducts Graham holdings; simply put, CABO is going to be buying back stock when there simply is not much float available, and that dynamic should begin in the next couple weeks
* High strategic value: CABO’s strategic value is very high in this rapidly consolidating industry, as synergies are bountiful both in terms of programming cost and SG&A expense rationalization, potentially driving a sale multiple to 11-12x standalone EBITDA for this asset with a long growth runway, strong pricing power and minimal competition; as JPM noted “we believe that Cable One offers more than the typical level of synergies… and believe an acquisition multiple of 11-11.5x could be justified.”
* Clear value creation opportunity: I believe the management/board plan is to execute an aggressive leveraged share repurchase (of at least 20%, possibly more if permitted) in the first 1-2 years and then sell the company to Malone (or other strategic) in a tax-free stock deal; this was likely a major reason for Graham’s 180 degree pivot and decision to spin CABO (previously he had said no spinoffs)
* Imminent catalysts: Share repurchase authorization appears set to be announced and implemented in a matter of days (with earnings release?), after which I expect to see very aggressive repurchases and rapid re-rating of shares
John Malone Explains Cable Math
“I used to say in the cable industry that if your interest rate was lower than your growth rate, your present value is infinite. That’s why the cable industry created so many rich guys. It was the combination of tax-sheltered cash flow growth that was, in effect, growing faster than the interest rate under which you could borrow money. If you do any arithmetic at all, the present value calculation tends toward infinity under that thesis.”
“If you think long-term interest rates are going to be high because of inflation, that’s always been kind to our type of industry, because our cost structure is largely fixed. Inflation lets you raise your rates and devalue your liabilities. Historically, inflation has been a growth builder for our kinds of industries.”
Illustrative CABO Math
* Growing EBITDA at 6.0% annually and increasing gross leverage to 3.0-4.5x per management guidance will allow the company to repurchase 27-46% of shares outstanding and 33-56% of the float by 2018, even assuming the company is repurchasing shares at increasing prices over that timeframe
* Total returns to shareholders likely 60-100% by 2018 at 10-12x EBITDA exit
* Note that net debt in this model is conservatively well below what many cable executives, including Malone, tend to believe is optimal
* Analyst Day presentation: http://ir.cableone.net/file/4137149/Index?KeyFile=1500073042
* Malone interview (2009): part 1 (http://www.bizjournals.com/denver/stories/2009/04/20/daily97.html?page=all), part 2 (http://www.bizjournals.com/denver/stories/2009/04/27/daily24.html?page=all), part 3 (http://www.bizjournals.com/denver/stories/2009/04/27/daily45.html?page=all)
* Biggest risk is regulatory, however with Charter/Liberty buying Time Warner and Bright House, and Altice buying Suddenlink, seems the FCC is on board with major provider consolidation; regardless, CABO is tiny compared with these other companies
Disclaimer: The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice. The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates. No representation or warranty is made as to the accuracy of the data or opinions contained herein. Please do your own research.
* Investor awareness and understanding
* Imminent announcement of initial repurchase authorization (with upcoming earnings release?)
* Announcement of additional debt financing, which will surely be used to repurchase stock
* Increasing margins and declining capex, increasing FCF
* Awareness of the “super safe harbor” exemption permitting a sale event
* Sale of the company to one of several likely interested strategic buyers
|Entry||07/23/2015 01:08 PM|
The third para should read "the market cap is $2.3bn" not 3.2bn. It's correct everywhere else, just typo there.
|Subject||Sticker Price Per Mbps Versus Realized|
|Entry||07/23/2015 01:49 PM|
Cuyler, thanks for the writeup. I saw from the CABO presentation that they note $/mbps which seems like a realized value (given that the actual speed you get differs from the stated max speed). On a sticker price level though, CABO doesn't appear to charge a discount (esp. given they don't focus on triple play deals). What gives you the sense that they can raise 'sticker' prices given consumers may not be as informed on this 'realized' price? I guess a premium product might have better churn -- would seem like the way to get price is to offer higher speed . . .
|Subject||Re: Sticker Price Per Mbps Versus Realized|
|Entry||07/23/2015 02:03 PM|
Ruby - They will definitely be increasing prices for the reasons mentioned in the writeup, but the two primary reasons being (i) the company is a monopoly if you want real high speed data in these markets and (ii) higher speeds drive higher initial pricing and raised pricing for inevitable upgraders. There is essentially no alternative in CABO's markets.
High speed cable internet has the elasticity of water in the desert in today's world, and the industry's investments rightly drive pricing power, but this is particularly true in non-urban markets like CABO's.
Business internet, by the way, is rightly much more expensive than residential for the same product, so an increasing mix there helps too.
As Malone described in the quote I provided, inflation is a wonderful thing in the cable industry, as costs are relatively fixed.
|Subject||Re: Re: Sticker Price Per Mbps Versus Realized|
|Entry||07/23/2015 02:12 PM|
cuyler, i have a country place in the sticks, and i use direct tv for tv and local crappy expensive dsl for internet. if direct tv ever adds an internet service option i am ditching dsl in a flash.
have you taken a look at whether this is a possibility, especially as direct tv gets acquired, and what effect this might have on cabo?
|Subject||Re: Re: Re: Sticker Price Per Mbps Versus Realized|
|Entry||07/23/2015 02:26 PM|
DSL sucks, I agree.
This is no risk to CABO. Satellite internet is very slow and expensive. HughesNet, for instance, maxes out at "Up to 15 Mbps" and WildBlue maxes out at "Up to 12 Mbps" and your data is restricted. These are DSL-like speeds.
CABO is going to be completely upgraded to standard 100 Mbps by January, as I noted before.
|Subject||Re: Owning vs. LBRDK/A|
|Entry||07/23/2015 02:44 PM|
Well, CABO is far better, in my opinion. Liberty securites are too crowded for me with a bunch of zealots and you're playing for too little upside from what I can tell. CABO story is nothing like that, but much more straightforward and off-the-radar, and upside is much larger.
I see why people love Malone and Liberty - the guy is brilliant. Many big funds would rather own Liberty for the liquidity, which isn't a consideration for me.
No reason you can't own both. Cable is a great business. I just think CABO is very unique, as I think we are going to see this company try to buy back a shitload of stock in a very low-float environment, at the same time as earnings are rising. I can only speak for myself, but I kind of like that dynamic....
At the end of the day, these CABO shares might turn into Liberty/Charter shares anyway.
|Subject||Re: Premium to Suddenlink|
|Entry||07/23/2015 03:36 PM|
CABO likely gets a premium to Suddenlink because:
- Much lower penetration
- Much lower current pricing, greater ability to raise prices
- Much larger synergies available to strategic buyers
But, you don't need a premium to Suddenlink to make this idea work big. Suddenlink went for 10.3x unadjusted LTM EBITDA. Quoted multiples are all over the map, and most are forward, synergy-adjusted multiples to make them appear lower.
While clearly the JPM analyst misses the big picture here, he does a decent job highlighting the higher synergies available with CABO than with other players. Worth a read.
|Subject||Re: HSD growth|
|Entry||07/23/2015 05:25 PM|
Nails - my thoughts exactly on the value provided. My monthly cable bill at home is $200, and I'm not even on the highest speed tier. Maybe I should move to Idaho.
Re churn/renewals, on p. 17 of the presentation they show that HSD renewal intentions have risen from 83% in 2012 to 88% in 2013 to 92% in 2014. I don't have data for bundles, but CABO explicitly does not care about bundles. As it says on p. 12, "Seek to maximize overall free cash flow...not triple-play or video subscribers."
Both Residential and Commercial HSD customers are growing (commercial faster, which is nice to see). I suspect that as CABO's HSD offering continues to increase speed, the differentiation from DSL is exacerbated, causing consumers to shift to cable internet. Seems to me we are at the beginning stage of this trend.
The January upgrade to 100 Mbps should really highlight the difference.
|Entry||07/23/2015 05:28 PM|
Thanks for the write up - very thoughtful.
|Entry||07/23/2015 05:47 PM|
ValueGuy - thanks, man. You got it.
|Entry||07/24/2015 01:17 AM|
Thanks for the interesting idea as usual. 2 questions 1. Are there additional costs to become a standalone public company so is the 300 a good starting point? 2. All the reasons you highlight to explain the future ebitda growth (mostly pricing increase) could have already been made 2-3 years ago and yet ebitda growth has been very low. Why would ebitda growth accelerate now? What is different now? Is there any reason why pricing could suddenly be increased significantly now when it couldn't 2 years ago? Maybe the faster speed in January is the catalyst. Any thoughts? Thanks
|Subject||Re: 2 questions|
|Entry||07/24/2015 08:10 AM|
- The $302mm of LTM EBITDA is right out of the presentation. My understanding from the GHC CFO was CABO essentially was already having a full audit and tax work done under the GHC umbrella, which is a big reason why the spin could be done so quickly. CABO was always a separate company under GHC.
Yes, higher EBITDA growth now for a couple reasons:
- As video becomes a very small part of the business, the growth of high speed data/internet becomes increasingly important. Sort of like the IBKR brokerage vs. market-maker dynamic, with high-margin broker growing and low-margin market-maker declining.
- Doubling of standard high speed data speed, driving both new customers switching providers as the speed gap widens and DSL doesn't cut it anymore for streaming, etc., and existing customers upgrading speed and pricing.
- The decision to really get aggressive in cutting video costs began this past year (e.g. Viacom purge), driving stabilization in this business.
- Surely the company will be particularly focused on FCF maximization now that they are a public company with their own currency.
|Entry||07/24/2015 09:42 AM|
Have you talked to CABO mgmt about buying back stock? When I spoke to them I got the sense that they were not buyers at these levels-would prefer to look at M&A and would be more opportunistic at lower price. Would be interested if you got a different sense.
|Subject||Re: share buyback/mgmt?|
|Entry||07/24/2015 09:50 AM|
Not sure what they told you, or if they are trying to hide the ball a bit to buy stock as accretively as possible, but they are clearly not buying any other cable companies here, and they are definitely going to be buying back stock.
"Optimal sustained target leverage of 3.0x trailing EBITDA, plus or minus half turn. Comfortable periodically adding an additional 1.0x of leverage for strategic value creation."
"Do not anticipate major bolt-on cable system acquisitions in near-term."
"Expects to receive authorization for stock buyback program following the spin-off."
GHC historically is a company that is very private in its plans, and CABO will be the same. Based on the CFO's comments and GHC's history of aggressive share repurchases, this is clearly going to be a repeat. They know the float is small, so if I were they I would keep my plans close to the vest as well.
|Entry||07/24/2015 10:14 AM|
I unfortunately forgot to mention in the writeup that Graham gave CABO a single share class structure, which also invites more strategic activity.
Here are his comments from December 2014, shortly after they announced the spin:
"So the third large event we've just announced is the spin-off of our excellent small cable company, Cable ONE. We announced that transaction only 4 weeks ago, so we have little to add what we said at the time. We're pursuing the spin-off after conversations between Tom Might, the longtime CEO of Cable ONE, and me. Tom came to work for The Washington Post newspaper in 1977, moved to the cable company in 1993. So you could say he and I are pretty familiar with each other. And we've talked over strategy in the cable business many times.
After a conversation about a year ago, Tom and I agreed that trends in the business had changed enough that Cable ONE would be better on its own, where it could choose amongst strategic possibilities as a public company. Tom is here and in the audience, along with one of his executives, today and if anybody has questions related to Cable ONE that they'd like Tom to answer, we can do that, too. But you'll have plenty of opportunity to question him in the course of Cable ONE becoming a public company.
I've said as part of the spin-off, I'm a shareholder of both companies and I don't plan to sell any of my stock in either. Any stock that I own or any in the trust for my benefit I'm going to keep. The new cable company is expected to have one class of stock, Graham Holdings traditionally has had 2, and about $400 million to $500 million in outstanding debt incurred as part of the spin-off. Obviously, if the Board of Cable ONE wants to more borrow more, they certainly can. $400 million to $500 million is not enormous leverage for a company of Cable ONE's size."
|Entry||07/28/2015 12:11 PM|
Thanks for the writeup, very helpful.
One question I had is that the mgmt. team has articulated that doing M&A is the #1 use of cash and that buybacks are #2. They've spoken about doing fiber and cable deals. What could they potentially buy and if so, why would they want to do that instead of buying back stock? I thought that they didn't have much competition, so I'm unclear as to what they would buy and how the mgmt. team thinks about valuation and cash on cash returns post deal.
|Subject||More on the power of price increases|
|Entry||07/28/2015 12:32 PM|
From the 10-12: "We expect to complete a substantial multi-year investment program in our plant by the end of 2016, which will result in increased broadband capacity and reliability and enable us to offer even higher download speeds to our customers (at both the standard and enhanced data service levels), which we believe will reinforce our competitive strength in this area."
Also from the 10-12, 1q15 residential data revenue was $69.1mm ($276mm annualized) and business revenue was $21.2mm ($85mm annualized).
Inspecting the current price list, it is worth noting that the pricing for 75 Mbps is $75/mo (1.5x the pricing for 50 Mbps) and pricing for 100 Mbps is $100/mo (2x the pricing for 50 Mbps). This ignores 3 month promotions per the fine print.
With a network wide upgrade to DOCSIS 3.0 complete by 2016 enabling a doubling of internet speed from 50 Mbps to 100 Mbps, it seems reasonable to assume significant subscriber growth (as Cable speeds ramp far above DSL capability) and substantial increases in realized price.
Sensitize however comfortable, yet it seems to me that the levers are likely there to drive substantial price increases. Further, with Cable One presently priced at $1.86/Mbps vs. the median competitor at $2.40 and Suddenlink at $2.88/Mbps, there is clearly a tremendous amount of headroom here.
All else equal, and assuming no incremental penetration from it's very low current 31%, a mere 20% price increase alone would drive a $68mm increase in Internet revenues (allocates estimated 75% of business revenue to HSD), which is 23% of current EBITDA. A 30% increase in pricing is $100mm of increment. There is tremendous headroom here as existing subs upgrade and applications increasing require higher bandwidth. A 20% price increase still would leave CABO far below the median of its peers' pricing.
JPM, despite its $476 base/$529 takeout price target, assumes a ridiculously low growth in ARPU of 5.0% (or $2.50). In my view, this is absurdly conservative. JPM seems to concede this in saying "We believe there could be substantial upside to this if Cable One chooses to raise prices for existing broadband customers as part of the speed upgrade." Well, no shit. My cable company has never had qualms about raising my prices, because I have no choice...
Sellside is whiffing on this one.
If a flat to declining company like Outerwall can drive its shares up nearly 100% with a levered repurchase, a growing monopoly with increasing penetration like Cable One will most certainly drive serious shareholder value.
|Entry||07/28/2015 08:14 PM|
HTC - sorry, I just saw this in the VIC email notice. I'd refer you to my comment in #29 below.
I think the priority here is clearly repurchases, as they explicitly say no significant M&A. I see no meaningful use of funds outside of share repurchases. Perhaps they are trying not to telegraph their intentions too directly.
As I said earlier, I think they correctly view this as a race to create shareholder value, and Graham's comments over the last 8 months corroborate that.
|Subject||Re: More on the power of price increases|
|Entry||07/30/2015 10:42 AM|
Seems obvious to me that we are nearing an inflection point in pricing and upgrades when I see articles like this.
|Subject||Re: Re: Re: More on the power of price increases|
|Entry||07/31/2015 08:22 AM|
1) "cable companies have always had the ability to raise prices. with internet, even more so. it is, afterall, a monopoly." I obviously agree with this. I live in a large metro market and my video and internet bills have both risen nicely (for my provider, less nicely for me!). CABO's penetration could easily go from 30% to 50%+ on a standalone basis at the same time prices and speeds are rising significantly, though you don't need numbers anything like this for the stock to be a success.
2) "totally agree that CABO margins should head up once they complete the upgrade." Yes, to me this looks like a huge tailwind that is unappreciated at present.
3) "the question i have is why so into CABO vs. other cable?" For me, I'd rather own the unknown small/mid-cap that's going to grow earnings, lever up, shrink its shares and be sold than the megacap that has to rely on buying other companies at an accretive price in a competitive bid market. While I think it is plain that CABO will be sold, otherwise Graham would have just kept the company inside Graham Holdings, to me this is a highly unusual setup in a great industry. Combining (i) spinoff from an unfollowed parent company, (ii) mere 1.5x leverage going to 3.0-4.0x leverage, likely in the near term, (iii) imminent buyback announcement and I believe aggressive repurchase coming over the next 12 months. Keep in mind Don Graham's history with regard to aggressive repurchases, and take a look at the GHC sharecount over time, which is hilarious almost in the speed at which they have retired shares. Big buybacks are in his DNA, since Buffett first suggested the idea to his mother.
In any event, the dynamics here all point to a much higher share price.
|Subject||CABO spectrum licenses|
|Entry||08/04/2015 10:19 AM|
Here's a list of 27 active spectrum licenses owned by Cable One that I downloaded from the FCC website a couple weeks ago. I am not sure how to value, so haven't included in my valuation. I also only searched under "Cable One" so perhaps there are others under other subsidiaries' names.
Back in 2014, the company sold some spectrum licenses it decided it didn't need for almost $100mm.
This is the comment in the Form 10-12:
"In 2006, we purchased wireless licenses for $22.2 million as part of the FCC Advanced Wireless Services Auction. The wireless licenses were purchased so that we would be able to offer wireless services to customers in our service territories if we believed that business prospects for these services were favorable. In July 2014, we sold the wireless spectrum licenses for $98.8 million, and a pre-tax gain of $75.2 million is included in connection with these sales ($48.2 million on an after-tax basis). We never utilized the wireless licenses in our operations, so the related gain on sale was recorded in “Other Income”. Additionally, prior to the sale, the wireless licenses were classified as indefinite-lived intangible assets on our balance sheet. Therefore no amortization expense was recorded during the periods that we owned the wireless licenses."
|Subject||Re: CABO spectrum licenses|
|Entry||08/04/2015 01:29 PM|
Hi Cuyler, thx for all the good DD on this.
I'm confused by this latest comment though. Does CABO still own any of the spectum licenses or did they sell them all in the transaction referenced in your comment and the 10-12?
|Subject||Re: Re: CABO spectrum licenses|
|Entry||08/04/2015 02:00 PM|
Per the FCC website, these 27 active licenses are still owned by Cable One.
To get the 27, input "Cable One" into the name line, and check "active" box.
There's probably a way to find out which licenses were sold and to whom for what prices, but I'm not sure how exactly to do that.
|Subject||Re: Re: Re: CABO spectrum licenses|
|Entry||08/04/2015 02:08 PM|
And, it appears that if you go to this 2nd website, you get 30 additional licenses owned by Cable One, which appear not to overlap with the first list of 27.
go to "search by name" and enter "cable one"
confusing to me, but perhaps these are valuable assets?
|Subject||Q2 '15 Earnings|
|Entry||08/04/2015 06:24 PM|
CABO reported Q2 '15 earnings. Interested to hear people's take. Mine is below
Overall I think the large ARPU increase is very positive for the residential business going forward - should get some nice margin pull in coming quarters.
Interested to hear if anyone has any context around the video sub growth and commercial sub growth weakening a bit.
|Subject||Re: Q2 '15 Earnings|
|Entry||08/05/2015 08:12 AM|
Yes, I think this earnings "beat" in the company's last quarter as part of Graham Holdings is just the tip of the iceberg in terms of price increases and revenue growth to come. Clearly (to a few of us, at least), we're approaching an inflection point. Remember, the doubling of internet speed to 100 Mbps is largely a late 2015, early 2016 timing for completion. This will drive (i) higher penetration at high end speeds, as cable speeds begin to widely eclipse DSL speeds; (ii) higher pricing from consumer upgrades; and (iii) faster growth in business services.
FCF grew a whopping 27% y/y from $35mm to $45mm, while capex has begun its descent, coming down from $44mm to $33mm. Headcount is also coming down slightly.
With resi data customers +2.4% (and penetration still tiny at 32%), and business data customers +9.4%, the trends are going the right direction and there's a very long runway for growth.
In the coming quarters, we should see very substantial gains in both penetration and pricing, which, coupled with declining capex should lead to high growth in Free Cash Flow.
Finally, consistent with the investor presentation, I expect we'll see the initial share repurchase authorization at the same time the dividend is formally announced, consistent with how Graham did so in May (2 wks after their earnings release). Expect management to be a bit coy regarding repurchase speed, as I'm sure they don't want to telegraph too much before they buy the stock. And further, expect a notes offering to take leverage up to ~3x after Labor Day as Fletch noted earlier.
|Entry||08/05/2015 09:57 AM|
I have read thru the original posting and comment thread, and it seems to me that the board is largely missing the key issues in standalone valuation (and I understand that Cuyler's thesis also largely hinges on probability of being acquired . . . see last paragraph) . . . specifically, where is CABO after its fairly radical transformation. In short, I have no idea if cuyler's 6% EBITDA growth is correct, but I do not think looking at y-o-y EBITDA growth at present is relevant.
Extrapolationg from current EBITDA growth numbers (whether high or low) seems pointless because clearly the effects of the deliberate transformation are overwhelming the effects of any secular medium/long term growth (or lack thereof). And extrapolating from the video subs shrinkage is also pointless as they are effectively trying to weed out these customers. If they were losing 20% of video subs while not raising prices or product mix, then clearly, they have a huge problem . . . but that is not the case.
I tend to be bullish because it seems to me that they are transforming the business to a much higher quality one and one that is much less vulnerable to content pressure and consumers choosing to forego video for Netflix/Hulu. And they are making this transformation with little effect on EBITDA and with reasonably low capex. After the transformation is complete, I think they will have significant growth -- both units and pricing -- as consumers respond to their new business model and as they will have already weeded out the low-value customers and as they have low-hanging high ROI growth opportunities (esp business customers). Combine that with competetive dynamics (vis-a-vis other cable companies with FIOS, etc.) and it seems to me that they do deserve a premium even absent probability of getting acquired.
And the bear case is that mgmt has mis-judged the tradeoffs of price/product/volume . . . customer units keep dropping and price increases can only make up so much . . . and so we end up in a year or two with a lower normalized EBITDA number and minimal revenue growth . . .
And I would also add in support of the bull thesis that the transformation of the business model will make it more attractive to an acquirer and seems to indicate to me that mgmt intends to sell. If they intended to simply hold onto the business for the long term, I would have expected a slower and less dramatic transformation.
|Subject||Initial buyback = $250mm|
|Entry||08/06/2015 11:23 AM|
The CEO disclosed a minute ago that they are going to announce an initial $250mm buyback in the 10-Q when it comes out. In a follow up, he refused to describe the nature of the buyback, exactly as I expected (seems to me they don't want to telegraph their plans, which I expect to be aggressive).
|Subject||Re: Initial buyback = $250mm|
|Entry||08/07/2015 09:27 AM|
The transcript is out from yesterday's call, and here's what CEO Tom Might said about the buyback.
Perfectly coy, as expected, and precisely what you would say if you planned on being aggressive in your repurchases and didn't want to telegraph it.
It is also very interesting that there, at least so far, has been no press release on this authorization - rather, it was disclosed as a Subsequent Event in the 10-Q (after Might's comment on the call).
Finally, with the initial buyback set of $250mm or 600k shares ($417 implied average), it might not be unreasonable to think there will be a good bid for the stock.
Regardless, the sellside here is missing the boat, I believe.
I guess, first, can you talk about your potential for a buyback or otherwise return on capital?
Thomas O. Might
Okay, I'll take that one. This is Tom. We have an authorization -- on the buyback, we have an authorization for up to either $250 million or 600,000 shares in place. And of course, we've come out with $6 [indiscernible] or $1.50 quarterly dividend as well.
And so how do you...
Kevin P. Coyle
You will see that information disclosed as a subsequent event on the buyback in our 10-Q, which will be released today.
Yes. And how do you think about returning that capital, Tom? Is it opportunistic if the shares were to weaken? Is it sort of a regular return on capital like some other cable companies do?
Thomas O. Might
I prefer not to describe it at this point.
|Entry||08/07/2015 03:09 PM|
Nice writeup, thank you. Post T acquiring DTV, I believe they've agreed with the gov't to pass an incremental 10 million homes with a high speed offering. If T competes with CABO in 20% of CABO's markets, what do you see the risk being of T upgrading those homes? thanks
|Entry||08/07/2015 03:23 PM|
Drew - Thanks.
Owing to CABO's non-urban demographics, AT&T is minimal threat to CABO for the foreseeable future, and more likely will build in areas of Comcast, TWC and Charter (that's where the density is!). As noted, currently <1% of CABO customers have access to fiber-to-the-home. Mgmt stated on the call that they might do some in greenfield areas or in a neighborhood or two, but nothing more than that at this point.
If you go on ATT's website, it doesn't even list any of CABO's markets as "being explored", much less "planned." ATT is going after the bigger metro areas.
Mgmt is watching, as they say, but this would also take years, and in the next 1-2 years CABO is going to have much higher pricing, much higher speeds, higher penetration and a lower sharecount.
|Subject||CABO's new 1Gb fiber offering|
|Entry||08/31/2015 01:32 PM|
Interesting article here from a Kansas paper regarding the newly available of fiber for businesses with speeds up to 1Gb.
Further, it discusses CABO's launching 300Mbps speeds to residential customers this coming year, which would be a 6x speed increase over the current max speed.
Clearly pricing is going to be on the rise.
“Our business customers are already taking advantage of Gig service and it won’t be long before residential customers have access to it as well,” Niemann said.
|Subject||Buyback and acquisition questions|
|Entry||09/02/2015 03:11 PM|
Was trying to think about this one a bit more today.
1. On the buyback, do you think mgmt. has already started purchasing shares? They mentioned the 250m authorization on the latest call and in the 10-Q, but am not sure if they mentioned timing on their repurchase. Also, do you think it's fair to assume that they use all excess cash flow to buyback stock once they lever up post 2015?
2. Altice recently bought suddenlink for nearly 10x forward EBITDA. When i do a side by side (cable one and suddenlink) they are basically identical assets except for the fact that cable one is 1/3 the size of SuddenLink. Similarities include declining video, growing broadband, underpenetrated base of consumers, and a growing corporate division etc. Is there anything preventing Altice from acquiring CABO today? I.E. do they have to wait a certian amount of time etc. before making an offer given the spin? if Altice paid the same EV/Sub as it did for SuddenLink, CABO would be worth ~50% more than it is today.
|Subject||Re: Buyback and acquisition questions|
|Entry||09/02/2015 03:19 PM|
1) Not sure if they've started buying back shares yet on the new authorization. If not, they surely will shortly. And yes, I expect them to use most of their FCF to repurchase shares.
2) No, I do not think they have to wait to sell the company. As detailed in my writeup, it is clear that the "super safe harbor" provision would allow them to be sellers at any time.
I've happily added this afternoon. Looks like someone got liquidated.
|Entry||09/02/2015 03:27 PM|
Cuyler - any FCC Regs (Title II, net neutrality) we need to be smart on regarding this name?
Anything about CABO that would be different from other cable co's (considering they are pursuing HSD strategy and don't own content)?
|Subject||Re: FCC Regs|
|Entry||09/02/2015 03:30 PM|
I don't believe so. Good article on "The winner is Big Cable" in WSJ y'day.
|Subject||20x max speed increase by 2016|
|Entry||09/03/2015 10:17 AM|
So, the focus of my writeup was on the doubling of max internet speeds from 50Mbps to 100Mbps by the end of 2015. The link I posted to the Kansas article in #50 got me thinking, wait, how are speeds going to 1Gb when I thought they were going to double to 100Mbps?
It appears I was missing the big picture here, which is that in 2016, the company will be freeing up sufficient bandwidth to offer data speeds "exceeding 1Gb/second" which would be a 20x increase over the current max speed.
Clearly, this will result in dramatically higher prices as consumers move up the speed curve that ramps much higher than I had initially realized.
Specifically, the 10-12 filing says this:
In addition, we have made significant investments in our business consistent with our strategic focus to enhance sales of residential data services and business services. We expect to complete substantial, multi-year plant and product enhancements by the end of 2016, which will increase our broadband capacity and reliability, as well as both the standard and enhanced download speeds that we offer our customers. These initiatives have caused us to incur several years of higher than usual capital spending. However, we believe the competitive benefits will be significant, particularly for data services.
We anticipate the foregoing capital projects will facilitate sustained increases in residential data and business services and customer satisfaction. We also believe that our levels of capital spending will decline going forward as these large projects are completed.
I believe we are investing here at an opportune time given the leaps forward we will see in the next 15 months.
|Subject||CVC - great readthrough|
|Entry||09/17/2015 09:16 AM|
Very nice to see CVC go for 10x LTM EBITDA. Unlike CABO, which has <1% fiber overlap and very low penetration (~31%), CVC has extremely high fiber overlap and very high penetration rate (~60%). Further, with CABO's max internet speeds set to rise 20x over the next 15 months, pricing will be rising significantly as the delta to DSL starts to shine through to business and resi customers.
I continue to expect CABO to buy back as much stock as they can get their hands on, grow their pricing and EBITDA, and eventually be one of the next to go.
Finally, I hadn't mentioned this before, but the President of Bright House Networks, Naomi Bergman, is on CABO's board. She is a true veteran, having been with Newhouse since 1987. It may not matter either way, but I like that she's there and creating a clear link to Rutledge and Malone.
|Subject||PunchCard Investing Blog|
|Entry||09/25/2015 12:05 PM|
For those who hadn't seen, a new post on CABO:
|Subject||$5/mo HSD price increase --> c. $27mm incremental pre-tax|
|Entry||09/25/2015 12:39 PM|
Following up on previous discussion of price increases, this seemingly innocuous one-liner press release at 8:15p a couple nights ago is a terrific development, which I think few appreciate mathematically.
A $5/mo price increase for residential high speed data customers, all else equal, equates to a $27.4mm increase in annual revenue, the vast majority of which should translate to incremental EBITDA (unlike in video, where price increases have responded to higher content costs).
The sellside has not commented on this devlopment, and when people appreciate the math I think we could see sentiment shift much more positively, as it should.
474,401 Residential Data Customers as of 6/30 (and growing)
x 12 months
= $27.4mm increment
On base EBITDA of $300mm, this is nearly a 10% pro forma increase.
And, of course, this does not include the widespread upgrades and ARPU increases associated therewith as max HSD speeds rise 20x in the next 15 months. The market not appreciating this at all, which isn't surprising given the spin dynamics and minimal coverage.
Cable ONE Announces HSD Rate Increase
|Subject||Re: PunchCard Investing Blog|
|Entry||09/25/2015 01:06 PM|
Excellent post from PunchCard. Well worth the read even if already well versed.
I'd argue it lays out the case for why CABO is worth more than cable comps. It has a quite different strategy. It also makes it a valuable acquisition for a large cable company seeking to understand the process and economics of transitioning.
And VIC and cuyler, in particular, got a shout-out! Well done.
|Subject||Re: Re: PunchCard Investing Blog|
|Entry||09/25/2015 01:23 PM|
Thanks, Straw. I enjoyed the writeup as well, yet saw that it also did not connect the dots on the magnitude of the impact of the price increase I described in my post a few min ago - good to see that even those following are not seeing the full story.
The strength of the CABO board is easily overlooked and largely unappreciated.
Naomi Bergman: President of Bright House Networks (to be acquired by Charter)
Tom Gaynor: President of Markel
Brad Brian: Munger, Tolles & Olson
Alan Spoon: GHC Board, Former CEO of Washington Post
Wallace Weitz: Weisz Investment Management
Katharine Weymouth: GHC Board, Former CEO of Washington Post Media
|Subject||Re: Re: Re: PunchCard Investing Blog|
|Entry||09/25/2015 03:34 PM|
You know the way you wrote that looks like you are on the board!
That was pretty awesome. Appreciate you explaining the economics.
|Subject||CABO set to roll out 1-gig services starting in November|
|Entry||10/13/2015 10:08 AM|
This is moving much faster than even I anticipated. I am trying to get my arms around this now. It says that 80% of the company's customers now have access to 100Mbps service and that 1Gbps service will begin rolling out next month, in November.
Looks like the larger announcement regarding 1Gbps coming in the next couple weeks.
Cable One set to roll out 1-gig services starting in November
Cable One will begin rolling out 1-gig Internet services across its footprint, starting in November.
A Cable One executive, who isn't authorized to comment and thus can't be named, told FierceCable the 1 Gbps rollout will target Cable One's entire 19-state footprint. Cable One representatives have not yet responded to FierceCable's inquiry for official comment. However, the executive said a larger announcement regarding the company's 1-gig plans will be made later this month.
Speaking to a state legislature committee focused on broadband, Aldo Casartelli, VP of Internet for Cable One, said the company will deploy 1 Gbps downstream service in McCall, Idaho starting in November, with deployment in Boise, Idaho coming January.
All of Cable One Idaho customers will have a 1-gig service option by the end of 2016, Casartelli, added. He said that about 80 percent of the company's customers now get 100 Mbps service, a benchmark he described as "almost unheard-of in the U.S."
Phoenix, Ariz.-based Cable One finished the second quarter with 457,401 data customers.
Cable One's announcement comes as other mid-sized cable operators in the U.S. have also embarked on rollouts of 1 Gbps services.
Last month, Suddenlink Communications deepened its 1 Gbps buildout, extending service to an additional four cities in Texas: Lubbock, Shallowater, Wolfforth and Post. The cable provider's expansion is being made possible through its $250 million investment in network upgrades via its Operation GigaSpeed program, launched last August.
Also last month, Midcontinent Communications said it will soon light its first three markets with 1 Gbps in South Dakota, bringing it another step toward its goal to deliver 1 Gbps throughout its entire footprint by the end of 2017.
|Subject||Run-rate valuation only 8.5x EBITDA|
|Entry||10/28/2015 12:19 PM|
Based on latest "good, not great" quarter per management, and adding in the benefit of the 10/1 price increase, EBITDA is $339 million, far higher than the $300mm that I think most people see.
On current valuation, that's only ~8.5x EBITDA
In terms of absolute value, special situations with catalysts, I don't think they get much better than this.
Looking forward to earnings next week. Q4 will reflect this price increase, and should also not have any excess IT expenses, and I expect that to be highlighted on the earnings call.
|Subject||Nice last qtr before price increase kicked in 10/1|
|Entry||11/05/2015 07:50 AM|
A nice last quarter ahead of what should be a major ramp up in EBITDA and FCF due to price increases (effective 10/1) and internet speed increases (doubled in October, rising 20-40x in next 12 months).
- EBITDA +6.2% y/y, EBITDA Margin +260bps y/y, FCF +123% y/y, Capex -40% y/y.
- Resi HSD revs +10% y/y, Business Services revs +15% y/y
- Q3 is the last quarter before CABO's $5/month HSD went into effect on 10/1. This is not mentioned in the press release, probably because they'd prefer it not to be in the local news, but they probably address on the call. $5 * 12 months * 458k customers = $27.5mm of incremental revenue and contribution margin.
- Q3 should also be the last quarter of billing system implementation costs.
- Repurchased $5.9mm of stock at average price of $415/share. They just authorized the program in August, so this is only probably 3-4 weeks of repurchases before the window closed. A very good sign.
On the call, look for management to talk about the Business Services and Enterprise opportunity as Gigabit speeds roll out to both Business and Residential customers, which is a 20x increase in maximum speed.
I think we are at the beginning of a significant inflection point here, which will begin showing up in Q4 numbers.
|Subject||"GigaONE Gives Cable ONE Markets Next Gen Speeds"|
|Entry||11/05/2015 07:57 AM|
Just saw CABO had a terrific press release out this morning highlighting that their new 1Gbps service. This is going to drive a major switchover from DSL and price & ARPU increase cycle for Cable One. Most importantly, this is not in any sellside numbers I've seen at all.
Some fantastic quotes in this release, particularly as it relates to new Business/Enterprise/Government/Education customers, which politicians are essentially saying is a mandatory upgrade:
GigaONE Gives Cable ONE Markets Next Gen Speeds
|Subject||Re: Re: Run-rate valuation only 8.5x EBITDA|
|Entry||11/05/2015 09:27 AM|
Nope, all Resi HSD customers get the price increase, otherwise it wouldn't be announced to existing customers. http://ir.cableone.net/file/Index?KeyFile=31184471
"After nearly five years without taking a rate increase, Cable ONE (NYSE:CABO) has announced to customers that it will increase rates on residential high speed internet plans by $5.00 per month beginning with October 2015 billing statements."
You would "raise hell" with your internet provider? Good luck with that! That's like raising hell with Exxon when gas prices rise. These aren't fixed rate contracts, beyond perhaps a 3 month intro package. Own the stock as your hedge. My cable bills rise like clockwork, sort of like my health insurance premia.
|Subject||Re: Re: Re: Run-rate valuation only 8.5x EBITDA|
|Entry||11/05/2015 11:32 AM|
A few minutes ago, one of the analysts on the call asked virtually this same question, highlighting the confusion among investors on this important point.
Management confirmed the price increase is for all Resi HSD customers effective October billing.
Further, management was asked about any customer pushback on the price increase, and CEO said that October was the highest number of new HSD subs CABO has seen in 15 months, so Q4 is starting very strong.
I expect some of this higher subscriber rate is due to the rising internet speeds, differentiating the CABO service from DSL.
Also, I have to wait for the transcript but the CEO also said something about Enterprise penetration being next to nothing right now, highlighting the large opportunity there.
Clearly Q4 is going to be terrific, and will illustrate a large ramp up in EBITDA run-rate. We are going to be looking at run-rate EBITDA of ~$340 million at that point, compared with the $300mm that was in the spin-off presentation.
|Subject||Simple valuation math|
|Entry||11/05/2015 12:11 PM|
So, simple math, at 10-11x 2016 EBITDA of $340mm, and before accretive share repurchases which the company is clearly doing, this is a $560-620 stock.
And this, with a high degree of earnings growth visibility and takeout potential at a significantly higher level, particularly now that Gigabit service is starting to roll out and major capex is behind us.
And net debt/EBITDA is only 1.3x right now, which is ridiculously low for a cable company (they should do a tender offer).
|Subject||Re: Re: Simple valuation math|
|Entry||11/05/2015 05:29 PM|
Not at all, they only had about 3, maybe 4, weeks to repurchase stock depending on how long it took them to get set up after board authorization and exactly when the window closed. They authorized the repurchase in August and window would have only been open for brief period.
Look for more repos in Q4 and beyond.
|Subject||Re: Re: Re: Re: Simple valuation math|
|Entry||11/05/2015 08:44 PM|
They announced it on the earnings call in August (pull the transcript, it was in response to a question about it, and Tom Might said that it would be in the Q), and it wasn't in print until the Q came out on August 6th. Once that happens, they still have to go about making arrangements with a brokerage firm to manage the process, get account(s) open, etc.
Remember, their August earnings call was their first as an independent company. It's not like they have all this stuff already set up from prior buyback programs.
This is a $560-620 stock on 2016 EBITDA and FCF alone, and buybacks will be accretive to these numbers. I am quite confident that buybacks will be very substantial here. I think $5.9mm was a very good start.
$340mm 2016 EBITDA (really, this is likely Q4 2015 run-rate)
x 10.5 midpoint
= $3.6 billion EV
- 0.4 billion net debt
+ 0.2 billion FCF
= $3.4 billion Equity Value
= approx. $590/share on current 5.8mm sharecount (pre-buybacks)
|Subject||Special Dividend declared|
|Entry||11/06/2015 08:46 AM|
Just saw that CABO declared a $1.50 special dividend, which I missed at first as it is the same as the quarterly dividend.
Might be indicative of a plan to significantly increase the payout ratio along with the share repurchase program. They clearly want to get the leverage up, and their FCF generation is so strong that it's not easy to do. Hence, I think additional special divs, an increased standard div, and even a tender offer for the shares might be on the menu here.
|Entry||11/06/2015 09:49 AM|
thanks for the idea, it looks very interesting. I have done some work on the name and I had one question, which was actually asked yesterday on the call but not fully answered.
CABO has the lowest HSD penetration in the inudstry, the most competitive offering out there and nearly monopolistic position in most of its markets. How is it that HDS customers are growing just c. 2% per year? In the last quarter they added 572 data subs, In Q2 this number was 505. I would have expected a much steeper adoption of their high-speed offering. What am I missing here?
|Subject||Re: Re: Special Dividend declared|
|Entry||11/06/2015 10:02 AM|
Azia - thank you! I read a Google Alert that titled Cable One Declares Special Dividend and the article looked like a press release on my phone. My bad.
Thanks again! That makes a lot more sense, as would have been peanuts. I was wondering if Graham needed some walking around money for the weekend!
|Entry||11/06/2015 10:04 AM|
Novana - This is because CABO's speeds have not historically been much differentiated from DSL. However, in October, speeds doubled across the network to 100Mbps, and will be rising another 10x in the coming quarters (starting in Q1 2016), bringing the total speed increase to 20x.
Therefore, in Q2 and Q3, CABO still had relatively undifferentiated internet speeds.
Looking historically doesn't tell you what's happening here.
As I noted earlier, from the Form 10, you can better see why the timing is good here, as speeds, pricing and penetration will all be inflecting significantly higher:
|Subject||Great CABO presentation this morning|
|Entry||11/11/2015 09:21 AM|
Lots of terrific slides in here illustrating the success of their HSD-centric strategy and high level of confidence in accelerating FCF growth, continually rising margins, etc.
One thing I'd highlight is the ARPU growth rate on page 19, which shows the ramp to 7.7% in Q3. CEO Tom Might noted: "And this 7.7% price increase is without the 10% price increase we implemented October 1st."
There was no other mention of the price increase or run-rate EBITDA pro forma for this increase, leading me to believe that very few observers have an appreciation for the dramatic ramp that is coming in Q4 and beyond in EBITDA and FCF.
|Entry||11/11/2015 05:32 PM|
cuyler and anyone else,
- What is the correct price for HDS for Cable One? For marketing purposes, perhaps they cannot raise the price to the "correct" price immediately. Is there any reason to believe that the $5 price increase is the last one? Or should we expect to see significant price increases every so often until they get to the correct price (and then maybe inflation price raises)?
I have had cable-provided Internet in various locations for several years now (with no video/phone) and I now pay $50 per month to Comcast, and I live in an area similar to those Cable One serves.
- but I get 50Mbps, not 1 Gbps
As well, since they are selling more and more to OTT customers, it seems like their pricing could be higher. I have been surprised that cable companies like Comcast do not raise the price of internet-only service for folks like me.
The more I look at CABO, the more I think that traditional cable EBITDA multiples might under-value this. First, I think they may have more price raises ahead of them. Second, the new biz model conversion of EBITDA to free cash flow is higher than the traditional cable biz model. For these two reasons, it seems that a higher multiple is warranted.
What does the Cable One business model mean for content? It seems bullish for the OTT guys (Netflix, Amazon), but bearish for the more traditional content. It seems as though content guys have squeezed too hard for their own good and that OTT is inevitable. Or am I over-reading the effect?
Of course, I am probably behind the curve as I know this was discussed when media content got smacked in August.
|Subject||Re: Re: Two Questions|
|Entry||11/11/2015 07:20 PM|
Straw you are on point. I'll reply tomorrow with some datapoints that go directly to your question. And the answer is, yes, CABO's service is significantly underpriced and pricing is nearly certain to rise sharply going forward. The implications for CABO's standalone (and strategic) value are enormous.
|Subject||Why Price/ARPU/EBITDA/FCF are set to rise dramatically|
|Entry||11/12/2015 08:40 AM|
Straw hit the nail on the head last night with his question: "what is the correct price for HSD for Cable One? ... should we expect to see significant price increases every so often until they get to the correct price (and then maybe inflation price raises)?"
This is precisely the point I have been trying to make - and why CABO is so misunderstood - we are literally, and provably, entering a new era for this company, as internet speed offered to CABO customers rises 20 fold in a matter of months, creating a massive differentiation from legacy DSL (which until October had been pretty close to CABO's cable HSD speeds).
This drives 3 trends:
1) New customer acceleration, who switch from DSL to CABO's high speed data. And this affects all of (i) residential, (ii) small/mid-sized business and (iii) enterprise customers. HSD is increasingly considered a "must-have" product, not just for OTT video but for everyday computing activities.
2) Existing customers upgrading their plans to higher speed, higher priced plans.
3) Ability to raise prices on existing plans.
The numbers here, comparing CABO's pricing to the pricing at my local cable internet company (which I recently called customer service at my cable company to confirm), are astounding.
HSD-only prices at my cable company as of this week:
300Mbps = $200/month + tax
By comparison, CABO's Q3 Residential HSD ARPU was only $53.26.
Keep in mind, this CABO service offering change is happening right now.
In October (so starting Q4, not Q3), CABO increased its standard speed to 100Mbps and top speed to 200Mbps. In the coming months, during 2016, CABO will be increasing its top speed to 1Gbps.
Even if CABO's pricing were only to go to the $78/month + tax that my cable company charges for 35Mbps service, this would be a 46% increase in ARPU for CABO. Clearly, some customers will choose the expensive high end, and some will choose the least expensive low end, but pricing is rising.
Further, a $78/month ARPU would imply a whopping incremental $137 million of EBITDA for CABO at the Q3 ending Resi HSD customer level ($25/mo * 12 mos * 458k Resi HSD customers), and in that case we're talking about EBITDA in the $450-500mm range and a stock price of $800+. There is minimal incremental cost associated with higher speed plans once the capex is invested and infrastructure is built.
And that is only residential, not business or enterprise.
I am guessing CABO is intentionally being very understated about this, because pricing is obviously a somewhat political topic.
On a standalone and strategic basis, the implications for CABO equity are enormous, and this is simply not understood.
And, as Alex implied, data caps could become a big hidden price increase, particularly as 4K video streaming starts catching on (4K TVs are already falling rapidly in price).
|Subject||Re: Re: Re: Re: Two Questions|
|Entry||11/12/2015 08:53 AM|
mrmgr - I think you're doing yourself a disservice looking in the rearview mirror. The world looks a lot different today than it did in prior years:
1) Previously, they had a product relatively undifferentiated from DSL, so it would not have been smart to raise prices. The differentiation is just starting.
2) Consumer and business demand for bandwidth and speed has begun to rise dramatically in recent years.
3) CABO's strategy (and the cable industry as a whole) are beginning to hit their stride as the industry rapidly shifts in their favor.
The world is changing fast, as evidenced by Netflix having been a 12 bagger since 2012.
|Subject||Re: Re: Re: Re: Re: Re: Re: Two Questions|
|Entry||11/12/2015 01:34 PM|
Alex - great post, and exactly in line with my thinking. At the Resi HSD ARPUs you suggest (which is exactly in line with my post this morning), CABO is a $450-500mm EBITDA company worth $800+ per share, and using today's sharecount (pre-buybacks) and today's HSD customer numbers (penetration set to rise significantly).
|Subject||Gig speed rollout and my EBITDA projections|
|Entry||11/13/2015 01:15 PM|
Talked to the CFO today, and he confirmed there is basically no incremental cost to the company associated with either the price increases or a plan upgrade that a customer might choose.
I told him about the pricing for HSD-only Resi in my market (the data I posted below in #91, where rates are $78/mo+tax for 35Mbps up to $200/mo+tax for 300Mbps), and asked what their pricing is going to look like for Gig service when it rolls out. He said they are deciding soon, but want to price it to get users using it, which I think is brilliant.
This is sort of like having the only liquor store in a bunch of small cities. Nobody downgrades internet speed, and once you get people hooked on ultra-fast downloads it's very hard to go back.
1 Gigabit speeds are going to begin rolling out in January (well FASTER than "by the end of 2016" as had been telegraphed), and he reiterated that this is not just going to certain customers, but EVERYONE in Cable One's service areas will have Gig access by year end 2016.
The excitement in CABO's service areas over this is tremendous. Google News search for Cable One gig city and you'll get a bunch of articles like this, where the mayor is saying things like "We are thrilled Rio Rancho will be a Gig City. Gigabit Internet service will not only provide our residents with the faster speeds they need to connect multiple devices in their homes, but it is also critical to the economic growth and development of our city."
It is easy to see how business and enterprise growth is going to be enormous.
In sum, I think the $5/mo price increase that started Q4 (and is not yet in the numbers) is only the tip of the iceberg, and we're about to see ARPU's shoot up dramatically as Gig service is rolled out. As such, I think we could easily see EBITDA go from ~$315mm in 2015 to ~$375mm in 2016 to $450+mm in 2017.
These numbers are dramatically higher than what anyone else seems to be considering. When I wrote this idea up, I was just modeling mid single digit EBITDA growth - I expect that is going to look absurd soon.
|Entry||11/23/2015 09:18 AM|
Just fyi, JPM report out on CABO - has a pt of $466 which he puts at 10x 2016 EBITDA and wonders about video sub losses vs new data subs. Talks re risk of telecom acqs which would look accretive using leverage but take away from strategic value, which I have not seen them focus much on but might not be thrilling. Also highlights risk moving from SMB to larger enterprises, as mkt share will be harder to profitably win.
|Subject||Re: JPM report|
|Entry||11/23/2015 09:24 AM|
It was a very dumb report, way off base, even though they raised price target. I talked to management and I am more confident than ever in my belief this is a $600 stock in the near future.
JPM has CABO at $316mm of 2016 EBITDA, which is absurd. CABO is going to be run-rating roughly $340mm this quarter (4q15) and speeds are rising 20 fold, driving HSD ARPUs much higher.
This is one of the best risk/reward special situations I've seen in a very long time.
I bought more stock on Friday.
|Subject||Re: Re: JPM report|
|Entry||11/23/2015 09:57 AM|
That makes much more sense, thanks. My math agrees with yours.
Appreciate the great work you've done on this one.
|Subject||Gigabit service rollout|
|Entry||11/24/2015 09:48 AM|
The Gig service rollout is driving a lot of local excitement, as can be seen by more community leaders touting the service. When was the last time you saw public figures drooling over their cable provider? It is easy to see how this is going to drive up ARPUs, EBITDA and FCF, while accelerating customer acquisition from legacy DSL/phone companies.
“We are excited for the Cable ONE launch of GigaONE and this investment in Twin Falls,” said Shawn Barigar, president & CEO of the Twin Falls Area Chamber of Commerce, in a statement. “High-speed Internet connections improve access to information from around the world and open up a host of new possibilities for our community, including contributing to our continued growth and economic development.”
|Subject||Re: Re: Re: JPM report|
|Entry||11/24/2015 02:18 PM|
Ares - The multiple is very reasonable, and reflects the fast FCF growth ahead of us and uniquely strong position CABO is in. I think a takeout multiple could easily be 11-12x. But that doesn't matter, I am being conservative and just looking at the tremendous FCF growth ahead of us, which virtually nobody seems to appreciate.
1) Strong latent pricing power, as ARPUs are far below those of competitors despite now offering faster service. See my post #91 for how far below market CABO is priced.
2) Substantial ARPU growth ahead, as 10x and then 20x HSD speed increases, which just began in October, and will continue through 2016 as 1Gbps service is rolled out to the entire service area.
3) Tiny, low single digit penetration in Small/Mid Business and Enterprise.
4) Low, ~30% penetration in Resi HSD.
5) Major capex is behind us, capex is falling and FCF is rising substantially.
6) Extremely low leverage at only 1.3x net debt/LTM EBITDA.
7) Sub 1% FiOS overlap.
8) Large potential synergies to a strategic buyer, in both programming and G&A expense.
CVC, on the other hand, is the polar opposite, with near full penetration, high FiOS competition, high leverage, minimal growth, etc., and it sold for 10x LTM standalone EBITDA.
|Subject||Re: Re: Re: Re: JPM report|
|Entry||11/24/2015 04:59 PM|
Cuyler, appreciate a detailed response. So 10.5x is justified because of growing FCF and EBITD (which makes 4Q 2015 EBITDA run rate not the best metric in terms of applying an industry standard multiple; 2017 EBITDA or FCF will show CABO as a way cheaper than 10.5x) and higher quality of the business. Got it. Thx again! Ares
|Entry||11/26/2015 01:13 PM|
Thanks for the great idea Cuyler.
We wanted to focus on their monopolistic market position so we did a study of 200 representative Zip Codes CABO operates in. We estimate these cover c. 700k homes, so over 40% of CABO homes passed. We therefore consider it a very representative sample. Wanted to quickly share the results:
* Out of these 200 zip codes, only 7 have FiOS. Their comparable offerings are $55 for half the speed of CABO or $65 for 75Mbps
* In 77 of these 200 zip codes AT&T is present with U-verse offering. In most locations their offering doesn't exceed 20Mbps. Where it does, the 45Mbps offering costs $65
* In 81 of these 200 zip codes (never the same as AT&T), CenturyLink is present with a basic DSL 10Mbps offer at $40 (73/81 zip codes) and in the other 8 zip codes they offer a fibre 40Mbps for $75 (prices do vary though)
CABO therefore seems to have some real competition in 7-8/200 zip codes, or c. 5% of its footprint, and virtually zero "fast" competition in most of its areas. It still remains a premium product as people that want a very basic connection can pay $30 to CenturyLink or even $20 to Frontier for a very basic DSL but going forward pricing power seems huge.
Question for you: I estimate Voice + Video + Advertising (all declining segments) to represents c. $88m in EBITDA in 2015, or c. 28-29% of the total. How do you see these declining over the next 2-3 years? Thanks again for the idea
|Subject||Re: Great idea|
|Entry||11/27/2015 10:00 AM|
Novana, thanks. Big picture, Cable One is a lot like Interactive Brokers, in the sense that (i) it is widely misunderstood and (ii) massive growth in HSD profits (akin to Brokerage) are obscured by Phone/Video declines (akin to Market Maker).
I expect CABO stock to follow a trajectory similar to IBKR, and I think this coming quarter's earnings (4q15) will be a strong catalyst.
A couple points:
- Focus on p. 15 of latest investor presentation. If you print off and get out your ruler, you can do a pretty good job of getting EBITDA by segment going back to 2010.
- Res. Video EBITDA is actually improving, despite declining revenue, as the company is raising prices and reducing costs (e.g. Viacom).
- Advertising is flat going back to 2010, not declining, at about $32mm of EBITDA.
- Res Phone and Video combined are only 20% of Total LTM EBITDA.
I can't harp on this enough, but the inflection point of speed increases and price increases are (i) not in the current numbers and (ii) coming real-time going forward.
|Entry||12/04/2015 02:27 PM|
LOL, thanks. I loved that article. Cable Internet is more addictive than cigarettes, and pricing will surely follow a similar path.
"The webpages that start playing a video when you load the page automatically, ads that pop up, things that happen in the background, Windows automatic updates. Most consoles have an automatic update. A lot of them will update, you go to play a game you haven't played in a while, the console updates everything first. Steam updates everything. I want to play a computer game with some friends, some of those games are 10 gigabytes plus. You've got four of us sitting around and want to play the game, we all have to install it and download it. Watching Netflix, streaming HD video, I think those things people expect to be able to do with a basic internet package at this point in time,” explained Olson.
|Subject||Crestview deal with WideOpenWest|
|Entry||12/14/2015 07:35 AM|
NY-based p.e. fund Crestview Partners is buying a 35% stake in Colorado-based cable provider WideOpenWest via a two-pronged investment that includes (i) buying a partial stake from existing sponsor Avista Capital Partners and (ii) making a $125mm equity investment into the company.
The reported valuation of the deal of $4 billion equates to $5,120 per WOW customer (782k customers) and ~10x EBITDA.
These metrics, applied simplistically to Cable One, imply $500-520/share at present, and clearly indicate that there are going to be additional consolidators beyond Charter, Comcast and Altice coming from the private markets.
Notably, however, CABO is a much better company, with a clean balance sheet and de minimis competition. In contrast, WOW has Net Debt/EBITDA > 7x (compared with CABO's 1x), and WOW has substantial competition from AT&T U-verse and Verizon FiOS (CABO has virtually no such competition, and now has industry-leading speeds).
CABO's low-leverage, clean balance sheet, low penetration, rising pricing and lack of competition seem quite likely to make it a prime target for highly leveraged acquirors.
|Subject||Re: Crestview deal with WideOpenWest|
|Entry||12/14/2015 09:10 AM|
How do you calculate your numbers?
Per the below presentation, LTM PF EBITDA for WOW as of Q1 2015 was $431M, implying a LTM valuation of 9.3x EBITDA.
If we apply that to CABO's LTM EBITDA of $301M as of Q1 2015 we end up with a target TEV of $2.8B, target market cap of $2.4B, and target price of $409/sh. How do you come out with an implied price of $500-520/sh????
Alternatively, we can look at this on a per RGU basis (more relevant than on a per customer basis given WOW's higher products/customer). WOW @ $4B is $2,520/RGU, which would imply an EV for CABO of $2.54B, and a target price of $365/sh.
|Subject||Re: Re: Crestview deal with WideOpenWest|
|Entry||12/14/2015 09:21 AM|
The report you're using is dated June, so not sure about that. I'm pulling WOW's numbers from CapitalIQ and the Moody's rating report, and using Cable One numbers giving effect to the price increase that went into effect as of 10/1 (Q4, so not in the current numbers).
Even if you use the 9.3x EBITDA number that you cite (for a minority, non-control deal for an extremely leveraged company), you get the following for CABO, a far better business than WOW:
$340mm price increase effected EBITDA
x 9.3 multiple
= $3.2bn EV
- 0.4bn net debt
+ 0.2bn FCF
= $3.0bn Equity Value
= $517 per share CABO valuation at 9.3x
As noted, I believe this valuation multiple is too low as it is below both CVC and WOW, and CABO has virtually no competition, rising prices, and speeds rising 20x.
As laid out in math in #99, I think this is a $590-600 stock in the near future.
|Subject||Re: Re: Re: Crestview deal with WideOpenWest|
|Entry||12/14/2015 09:33 AM|
To illustrate how much better positioned competitively CABO is than WOW, page 5 of the presentation (http://www.wowway.com/docs/wow/investor-relations/wow-company-update.pdf) from June shows that WOW has 53% overlap with AT&T U-verse, 52% with xfinity and 7% with FiOS, not to mention significant overlap with other cable companies (Charter, TWC and Bright House).
CABO has <1% FTTH overlap - basically only competes with DSL due to its small-city focus.
|Subject||~7.9x Run-Rate EBITDA here|
|Entry||12/16/2015 10:25 AM|
Fwiw, low volume weakness in last few days has made CABO exceedingly cheap here.
$427 share price
x 5.8mm shares
= $2.5bn market cap
+ 0.4bn net debt
- 0.2bn FCF
= $2.7bn TEV
/ $340mm run-rate EBITDA (giving effect to 10/1 price increase not in numbers)
= 7.9x run-rate EBITDA
|Subject||Re: looming technology threats?|
|Entry||01/06/2016 06:48 PM|
In declaring CABO most vulnerable, you are focusing on concentration of OTT customers, but wouldn't location be more important? I live in an area similar to (and adjacent to) Cable One areas. The coverage here does not even begin to support streaming for the vast majority of homes. Add to that if your neighbors are also streaming . . .
In my (thus far losing) argument with Kerrisdale on STRP thread, I argued that we would see a wireless "last mile," but it cannot happen with existing spectrum. It will need more spectrum, and I would argue it will be the 10+GHz Spectrum. But even so, if it happens, it will happen in cities and dense suburban areas. So again, CABO is the least vulnerable.
The T-Mobile promotion is not a large scale solution (and the article says as much). T-Mobile could not begin to support the all-in data demands of its customers on all their devices.
As for Sckipio, it will be interesting to see what the total cost of deployment per household will be. But doesn't G.Fast suffer from a similar distance problem as traditional DSL? And again, wouldn't this favor deployment in high density areas rather than the lower density areas that CABO serves?
|Subject||Re: Re: looming technology threats?|
|Entry||01/06/2016 07:26 PM|
In general I find the technology discussion in this space interesting, and try to stay on top of it / keep learning but I am certainly no expert...
That said here is a nice white paper on different copper technologies:
Can you elaborate what is new about Sckipio, is it the bonding of the copper? G.fast has been discussed for a long-time is being rolled out by BT and many others, and from my understanding requires Fiber fairly close to premise, which makes it very expensive to deploy and would probably make someone like CABO with a very dispersed footprint more immune?
Interested to learn more / hear others thoughts
|Subject||Re: Re: looming technology threats?|
|Entry||01/06/2016 08:15 PM|
Thanks Cuyler that's a helpful post. Could you expand on why the timeline can be measured in weeks now? You must be seeing something imminent?
|Subject||Re: Re: Re: looming technology threats?|
|Entry||01/06/2016 08:47 PM|
The CHTR/TWC approval is an expected Q1 regulatory decision, though I guess clock paused for 15 days, so late March is apparently how it's looking now. I believe that CABO will come into focus quickly for investors and acquirers alike once a decision is rendered, regardless of such decision.
|Entry||02/01/2016 09:27 AM|
Thank you for the idea and solid follow-up work.
I like the idea - strong competitive positioning, important and underappreciated mix shift, quality management and board, attractive capital allocation opportunities (the stock).
My question re telco assets: why has this been referenced by management? Sell-side has really grabbed onto this theme. What would the opportunity be here (even if we think it a bad idea? What type of assets? Why? Is this a red herring to disguise intent to acquire shares and sell the business (offering cover for safe-harbor)?
Just trying to understand what management is talking about and why?
|Subject||Re: Telecom Acquisitions|
|Entry||02/01/2016 09:30 AM|
I think dumb acquisitions are highly unlikely, as discussed on this thread back in November. This is a company that is on a mission to grow FCF and realize value for shareholders - hence the spinoff from GHC.
Take a look at the list of board members - the odds of an unforced execution error are very, very low here.
|Subject||Re: Re: Telecom Acquisitions|
|Entry||02/01/2016 10:02 AM|
I appreciate all that, Cuyler. Really just trying to understand the nature of any potential telco acquisitions? I'm at loss for what the strategy or thinking would be? I agree I take extreme comfort from the folks involved and past actions - CABO shutting down cable acqs once Paul Allen got in the game, Gayner, etc. Nevertheless, I'm struggling to even frame what the telco strategy or synergy would look like.
Any additional thoughts in this regard much appreciated.
|Subject||Re: Re: Re: Telecom Acquisitions|
|Entry||02/01/2016 11:33 AM|
TR - all they've talked about is small, tuck-in type of deals that fit their model.
As they say in the latest presentation TWICE, in large print:
"Cable ONE's operating focus is on long-term free cash flow growth, not short-term revenue or unit growth. We switched from a video-centric triple-play strategy to a Residential Data and Business Services strategy in 2012.
We like the early results and long-term prospects."
The stock is incredibly cheap here, with tremendous r/r setup, I think.
|Subject||Re: Is Google Fiber a threat?|
|Entry||02/16/2016 12:09 PM|
I am not at all worried about Google. CABO serves primarily small cities (think in Idaho, Mississippi, etc.) and GOOG is now starting to focus on big cities like Los Angeles.
I doubt GOOG sees the value in spending tons of money to compete when the incumbent (CABO) already is offering Gig service territory-wide this year. There are better places to compete, where incumbents have much slower service.
I also doubt CABO will even be independent long enough to see another real competitor.
|Subject||Re: Re: Is Google Fiber a threat?|
|Entry||02/16/2016 12:19 PM|
Further on that, as of 2015, CABO's top 5 markets were:
Treasure Valley, Idaho: 151k
Gulf Coast, Mississippi: 129k
Prescott, Arizona: 69k
Idaho Falls-Pocatello: 68k
Fargo, North Dakota: 61k
Of this group, Treasure Valley, Idaho and Gulf Coast, Mississippi comprised over 25% of PSUs.
|Subject||Regarding Goog Fiber|
|Entry||02/16/2016 02:02 PM|
Thanks cuyler1903. Based on your info, there is zero chance that GOOG Fiber gets to these markets in the next 10-20 years. If at all. I would say your thesis is fine from them.
It's CHTR that has to be worried about GOOG Fiber as the cities they are targeting clearly has a bullseye on the CHTR/TWC/Brighthouse combo. Smart move too as they have promised the street they would CUT capex the next few years. Not happening at all clearly and the street hasn't yet adjusted to the big lie. When it becomes clear they will need to INCREASE capex to fend off competition and roll out Docsis 3.1 (which needs a strong upgraded network to do so like CMCSA has) - likely a calendar 2017 event - then the street will recognize that the beneficiary is likely Dycom (DY). GOOG Fiber is an 8%+ customer for DY.
|Subject||Re: Regarding Goog Fiber|
|Entry||02/16/2016 07:11 PM|
Repetek: how capital intensive is it to upgrade to Docsis 3.1? We've generally hard not very - new cable modem and some headend equipment, $50-$150/sub and some of that equipment happens via regularly way capex (i.e. replacing/upgrading cable modems, onboarding new subs with 3.1 boxes, etc).
On CHTR capex, my understanding is the primary driver of lower capex is lower CPE costs (Worldbox vs. ARRS-type set top box), longer CPE replacement cycles given cloud-based architecture using thin-client Worldbox (over the wire software updates of UI), and growing self-install/remote service (fewer truck rolls).
Thx for thoughts
|Subject||Re: 2015 ##|
|Entry||03/02/2016 09:43 PM|
Agreed. During roadshow / shortly after, the management had a page in a deck where they talked about a low leverage, an appropriae amount of leverage (3x or 3.5x), and share buybacks. Not much has happened since then, which is super puzzling.
|Subject||Re: Re: Re: 2015 ##|
|Entry||03/03/2016 02:01 AM|
Shooter, it is possible. But then I am back to my question: why did they indicate an intent to lever up? => What has changed since then? In other words, if management never said anyting about taking more debt and lever up / sell was just a product of investors' imaginantion, I would totally share your view. Given that 3.5x was broadcasted, there are legitimate questions to management.
|Subject||Re: Re: Re: Re: 2015 ##|
|Entry||03/03/2016 02:28 AM|
I have good news. That question will be asked by jpm or another analyst along with why the data subs growth was only a couple thousand etc. it'll come up. They bought stock in the 430 range on average so I think maybe we need some patience. They been separate for 8 months.
|Subject||Re: Re: Re: Re: Re: 2015 ##|
|Entry||03/03/2016 03:48 AM|
Pure speculation but they may be working on some M&A. They said they'd lever up to 3-3.5x but M&A came ahead of buyback as capital deployment order of preference.
|Subject||Big quarter - run-rating above Street's 2018 estimates|
|Entry||03/03/2016 08:58 AM|
CABO reported a big 4q15 last night, with EBITDA and Free Cash Flow growing double digits, and posting earnings far ahead of the Street, and this looks to be just the beginning of the cash flow incline as HSD speeds (and therefore realized pricing and customers) ramp up over the next year (GigaONE 1Gig service rolling out now, through 2016).
The sellside and buyside, alike, are now going to be in major catch-up mode as the earnings power of the company and intelligence of the HSD- and Business-focused strategy becomes evident. Btw, one of the best things about CABO is that so few hedge funds own it (only 9% of shares at CABO vs. 39% at CHTR).
- 4q15 EBITDA of $86mm (prior to $2mm of insurance benefit) was dramatically above the Street range of $74-82mm. 4q15 did not even include a full quarter impact of the recent $5/mo HSD price increase - because it rolled out through October, only a half of October was reflected (per 3q15 conf call).
- 4q15 run-rate EBITDA of $344mm compares to the Street's 2016 estimate of $317mm, 2017 estimate of $327mm and 2018 estimate of $339mm. In other words, the company is currenctly run-rating higher than the Street's 2018 estimate!
- My own EBITDA and FCF numbers are now moving up a lot. I had previously modeled $318mm in 2016 and $337mm in 2017. It seems to me that they can pretty easily do $350-360mm of EBITDA in 2016, ~$400mm of EBITDA in 2017 and ~$450mm in 2018 as 1Gig service rolls out and the pricing and new HSD customer acquisition shines.
- The company repurchased $10mm (24k shares) of stock in 4q15 at avg price of $435, 10k shares more than they repurchased in 3q15. It is nice to see that they ratcheted up their price a bit (in 3q15 avg repo price was $415). Given that the stock nearly hit $490 during Q4, my guess is they had to go back to their board to increase their bid price, and perhaps that cost them a few weeks. Regardless, it is a very good sign to see them increase their buyback at higher prices intraquarter. I expect they bought back a good amount in Q1 with the lower share price. It might be worthwhile for the company to take a shot at a tender offer to see if they can shake free some extra shares.
Bottom line is CABO should be trading right now at $575+ on its way to $650+.
$400mm 2017E EBITDA
10x multiple (note JPM guesses 10-11x in a sale, I think higher due to low penetration, minimal competition, better infrastructure, clean balance sheet)
= $4.0bn TEV
- 0.4bn net debt
+0.2bn 2016 FCF
= $3.8bn Equity Value
/ 5.8mm shares (before any accretive repurchases)
Those looking out to 2018 EBITDA can see [($450mm * 10) - 0.4mm debt + 0.4mm 16-17 fcf] / 5.8 shares = $775.
|Subject||Re: Re: Re: Re: Re: 2015 ##|
|Entry||03/03/2016 10:28 AM|
Shooter, it is a legit point. Thx!
|Subject||Re: Big quarter - run-rating above Street's 2018 estimates|
|Entry||03/03/2016 11:48 AM|
Conference call just ended. Based on the q's asked, clearly the analysts are seeing that growth is much stronger than they thought. They reiterated several times that they aren't going to do any acquisitions unless they are highly accretive to shareholders, that they have no interest in M&A just to get bigger.
They highlighted the recent doubling of internet speeds and the expected branding benefit from GigaONE 1Gb speeds.
Finally, noted that they think the share repurchases have been "at prices we consider very attractive given the trajectory of our strategy."
Fully expect large increases in sellside estimates and target prices in the coming days.
|Subject||Re: Re: Re: Big quarter - run-rating above Street's 2018 estimates|
|Entry||03/03/2016 12:28 PM|
I thought it was good that they bought back almost 2x as much stock in Q4 as they did in Q3, despite the share price rising.
Right from the beginning, they have been very coy about their buyback plan, not even putting it in the press release (what other company can say that?). Their willingness to increase their buyback price is a very good sign. If they were to say explicitly "we're going to buy back stock as fast as we can" they wouldn't be able to buy very much.
At the end of the day, companies with low trading volumes can't just go out and bid aggressively for stock, they kind of have to wait for it to come to them, and given that there are limits on % of ADV and timing (can't buy in last 30 minutes), it's a lot different from large caps that can just waive it all in. For this reason, I think a tender would be a good idea.
I like this management team and board a lot. Good, honest people as far as I can tell.
|Subject||Re: Re: Re: Re: Big quarter - run-rating above Street's 2018 estimates|
|Entry||03/04/2016 12:11 PM|
Had a chance to speak with the CFO this morning (a conservative guy) and came away very impressed and confident.
From my perch, this is an incredibly cheap and double-digit growing subscription business with pricing power, HSD demand tailwinds and likely catalysts that is owned by only a few hedge funds.
Fwiw, I bought more stock yesterday morning.
|Subject||Re: Re: Re: Re: Re: Big quarter - run-rating above Street's 2018 estimates|
|Entry||03/04/2016 01:45 PM|
We agree and thanks for the write-up. But this one probably needs a fair amount of patience which is in short supply these days.
|Subject||Re: Re: Re: Re: Re: Re: Big quarter - run-rating above Street's 2018 estimates|
|Entry||03/04/2016 01:57 PM|
Things have a way of happening slowly, then very quickly.
If I had to guess, I'd guess this one plays out fairly quickly.
|Subject||Re: Big quarter - run-rating above Street's 2018 estimates|
|Entry||03/07/2016 11:52 AM|
TR - I run a few different cases, but the mid-case is what I cited in post 142 where I see EBITDA rising to $350mm in 2016, $390-400mm in 2017 and ~$450mm in 2018.
Street estimates are absurd in how off base they are (JPM is not yet published, so we'll see on that one). The fact that CABO just blew away street numbers in Q4 has to be a bit embarrassing, particularly to Wells who had $74mm vs. the $86mm CABO posted for Q4 EBITDA.
Because the buyside tends to rely heavily on the sellside, just give it a little time for these earnings to sink in.
This story is in some ways like IBKR's brokerage/market maker dynamic, in that you have the fast growing Resi HSD and Business Services lines overwhelming the video side, and intentionally so.
2016-17 should be robust for CABO, both from an earnings and investor attention perspective. In a few weeks, CHTR/TWC/BHC will be approved or not approved - either way, attention should then shift to who the next target is. CABO's clean balance sheet and very limited competition make it unusually attractive, of course.
|Subject||10-K, Accelerating Buyback + Hidden Asset Sale|
|Entry||03/08/2016 08:44 AM|
CABO filed its first 10-K last night. I have not finished going through it yet, but a quick skim reveals some excellent news:
1) The buyback accelerated dramatically in January and February, after nearly doubling in Q4 over Q3. Sharecount printed 55,249 lower as of 2/29 than as of 12/31, so they have repurchased a net of 55k shares in Jan-Feb vs. 24k shares in Q4 and 14k shares in Q3. This is very smart given the outstanding results they posted last week and business momentum.
2) The company is planning to sell its former HQ building in Downtown Phoenix. These are the properties at 210 E. Earll Dr., which consist of a 6-story Class A 158,000 s.f. building and 182,000 s.f. of parking garage. According to the Maricopa County Assessor's Office, these 4 parcels are valued at $23.9mm, $0.3mm, $0.5mm and $0.5mm, respectively, so call it $25mm in total per the Assessor's Office. Normally, these Assessor estimates are well below true market value. At $200-300/s.f., implied value is $31-47mm for the building alone, plus the parking garage value. Fully-leased at $25/s.f. net and capped at 7% would imply $56mm of value for the building alone, plus value for the parking garage. The building appears to be presently vacant, so that would limit the value achievable in a sale. The depreciated balance sheet value of the property is $8mm, so tax on sale can be estimated at various prices.
- Building: http://www.irgens.com/wp-content/uploads/2012/05/210Earll_lowres.pdf
|Subject||Re: Re: 10-K, Accelerating Buyback + Hidden Asset Sale|
|Entry||03/08/2016 10:06 AM|
Re the accelerating buyback in Jan-Feb, I do not know if they have a 10b5-1 plan for repurchase in place that avoids blackout periods or if they simply bought very aggressively in January.
Regardless, judging by the Q4 and Jan-Feb activity, I would guess that at the latest board meeting they decided to get much more aggressive in both size and price.
|Subject||Re: Re: Re: 10-K, Accelerating Buyback + Hidden Asset Sale|
|Entry||03/10/2016 11:42 AM|
JPM and Wells are now published, and I am very confident both are dramatically too low in their EBITDA estimates.
CABO is run-rating at $344mm of EBITDA, and JPM and Wells updated 2016/2017 estimates are $330/338mm and $318/334mm, respectively.
Based on management commentary and my own analysis, I think EBITDA continues to grow signficantly off this new base. As mentioned, I estimate they can will be pushing $400mm in 2017, or ~20% higher than these two firms.
The accelerating buyback was not mentioned by JPM, despite publishing after the 10-K came out (Wells published before the K was released). Seems they completely missed it. Very lazy.
I'm not aware of too many other growing subscription businesses currently run-rating above 2017-18 street estimates. These are either spin-off dynamics or a sellside that is intentionally wedded to the traditional cable model (or both).
Continue to believe stock is worth $575+ right now, on way to $650+ in next 12-18 months (on a standalone basis). In a strategic sale, I would not be at all surprised to see CABO command a huge stock-based premium due to its clean balance sheet, which could help potential acquirers reduce pro forma leverage.
|Subject||Re: Re: Re: Re: Re: 10-K, Accelerating Buyback + Hidden Asset Sale|
|Entry||03/10/2016 12:11 PM|
yes, headcount has been coming down.
|Subject||Re: Re: Re: Re: Re: 10-K, Accelerating Buyback + Hidden Asset Sale|
|Entry||03/10/2016 12:13 PM|
Further on SG&A reductions, from the conf call:
CEO Tom Might:
"And item number two to point out: Headcount reductions. Proving that most costs are variable and not fixed, we are down over 400 FTEs, a 17% reduction, in just 4 years, even though we were down only 50 last year. However, 2015 was heavily loaded with labor-intensive projects and conversions.
We have already resumed a more rapid pace again -- pace of improvement again in 2016. This is important because after programming expense, which is also a decrease in Cable ONE, labor is the second-largest operating expense at any cable company. These reductions have been accomplished through attrition, and we are proud that since 2008, our associates have helped us find and eliminate or automate hundreds of thousands of unnecessary customer contacts to make these savings possible."
|Subject||Excerpt from LBRDK Maffei/Malone shareholder letter|
|Entry||04/18/2016 01:22 PM|
"Events of the past year speak to the dynamism inherent in the cable industry. The transactions described in our 2015 letter were completely restructured, much to the benefit of Liberty Broadband as well as Liberty Interactive Corporation, which will soon be one of our newest investors. That said, for all the changes to who is buying whom, in what structure and at what price, the general trend towards industry consolidation continues. And how could it not? The economics of consolidation are compelling for acquirer and acquiree alike. As we’ve advocated for in the past, the scale these transactions create is integral to developing and deploying new generations of digital technology, to the ultimate benefit of consumers. This is an area where the US simply cannot afford to fall behind. Whether you believe it is keeping America great or making it great again, massive investment by leading cable companies will be a pivotal factor in our country’s digital future. For this and many other reasons, we at Liberty Broadband remain extremely excited about our investment in Charter Communications."
|Subject||Re: Excerpt from LBRDK Maffei/Malone shareholder letter|
|Entry||04/18/2016 01:30 PM|
Appreciate that. Let me just ask a theoretical question.
Does the fact that CABO has basically ignored cable and let it fall as it will provide an opportunity for more "synergies" for an acquirer with better cable economics. This is something I don't really see discussed anywhere. But wouldn't a larger cable operator have the opportunity to get:
I get this isn't the cabo model but if you're bigger with better economics wouldn't that make sense?
|Subject||Re: Re: Excerpt from LBRDK Maffei/Malone shareholder letter|
|Entry||04/18/2016 01:37 PM|
Yes, I would certainly expect so, but you are correct that is not the core of the thesis.
|Subject||Re: Excerpt from LBRDK Maffei/Malone shareholder letter|
|Entry||04/25/2016 04:04 PM|
With CHTR/TWC/BH now looking to be cleared to close, scarcity value is increasing.
Most importantly, CABO is the only cable company of which I'm aware that will offer 1Gbps service across its entire service area this year with a standard speed of 100Mbps. At the same time, with minimal debt (1x), falling capex, declining headcount and rising prices, we are seeing increasing FCF which is being used to repurchase stock aggressively (as seen most recently on the cover of the 10-K).
It is encouraging that we seem to have several avenues for very significant share price appreciation here.
|Subject||Big quarter and buyback - fwd estimates WAY too low|
|Entry||05/05/2016 08:32 AM|
The sellside wasn't even close. CABO is run-rating above the street's 2018 EBITDA estimates, while the buyback has accelerated massively, more than tripling sequentially in Q1 over Q4.
The stock is worth $655 on 10x 2017 standalone EBITDA of $400mm, and $775 on 10x 2018 standalone EBITDA of $450mm. Owing to large potential cost synergies (overhead and programming cost), JPM has said that an 11-12x deal multiple expectation is reasonable. Putting 11-12x on 2017 and 2018 EBITDA numbers would get us $800-900 per share to a strategic buyer, who surely love CABO's underleveraged balance sheet.
* 1q16 EPS of $4.65 (+23% y/y), vs. Wells estimate of $3.20 and JPM of $4.13
* EBITDA of $85mm (+14% y/y), vs. Wells estimate of $74mm and JPM of $81mm
* EBITDA-Capex of $58mm (+35% y/y) vs. Wells estimate of $38mm and JPM of $45mm
* Resi HSD revenue +21% y/y; Resi HSD ARPU of $59.94 (+18% y/y). (Unfortunately the historic penetration data trend is impossible to analyze, as the prior billing system viewed multi-unit buildings as just 1 home passed, while the new system counts each internal unit individually. Penetration is very low and climbing, though, so long growth runway.)
* Business revenue +13% y/y
* Repurchased $34.6mm worth of stock (81,834 shares) at avg price of $423. So, in the three qtrs post-spin, they have purchased 14k shares, 24k shares and 82k shares, in that order. A strong signal of management confidence.
* Cost savings as headcount down 5.0% y/y as most large capex is finished
* Capex down 14% y/y, again, as big upgrade projects are behind us
As I indicated before, we have several tailwinds working for us here as Maximum HSD Speeds, which will have grown 20x in < 2 yrs, causing a wide delta to the competition.
1) New customers (both resi and business) coming to CABO from DSL and satellite, and new first time customers signing up.
2) Existing customers moving up to higher speed packages at higher price points.
3) Price increases commensurate with the industry-leading data speeds (more of this to come, as CABO's standard speed of 100Mbps is far above "big cable" standard speeds). Further, it is clear CABO is executing a "land and expand strategy" as cable internet is very sticky once landed, and data demands are rapidly increasing.
4) Improving video profitability, as CEO Tom Might said in late April, "We made higher profits on video last year than we did four years ago, even though we have about half as many video customers. We realized some video starts were very profitable, but many actually cost money due to things like churn and bad debt. Once you solve that riddle and stop chasing unprofitable starts just to report good subscriber counts, you can actually make more money with far fewer customers."
Finally, we will at some point get a nice cash bump from the sale of the Phoenix real estate.
I bought more CABO shares during the quarter as well.
|Subject||Re: Big quarter and buyback - fwd estimates WAY too low|
|Entry||05/05/2016 08:44 AM|
Appreciate this. Can you bridge us to your $400M in 2017 EBITDA at a high level.
|Subject||Re: Re: Big quarter and buyback - fwd estimates WAY too low|
|Entry||05/05/2016 09:06 AM|
Big picture, current run-rate is $342mm at 1q16. This quarter's EBITDA growth was 14% y/y. Only 1 year of 14% growth from here is $390mm. Year-end 2017 is 7 qtrs away, so $400mm is quite reasonable and could prove too conservative an estimate as the mix continues to move in our favor.
Incremental HSD and business margins are extremely high as variable costs are negligible - obviously - and video profits are actually stable to growing (per Might's comments as well as the chart on p. 15 of the November investor presentation).
Investors and the sellside are scratching their heads (and seemingly in denial) here as the company quickly transforms to a high growth, high margin business as the business mix changes. Lots of love for "big cable" but CABO is going to get its lovin' too at some point.
|Subject||Re: Re: Re: Big quarter and buyback - fwd estimates WAY too low|
|Entry||05/05/2016 11:32 AM|
From the call, need to go through the transcript, but several very interesting points:
1) A $4.96/mo/video subscriber surcharge will begin in June. All else equal, this theoretically appears to be a $27.8mm increase in revenue. Sounds like they are the last of the cable companies to implement this, so it's possible this is some catch up with past content cost increases. As such, I wouldn't be surprised to see this be a significant additional tailwind to EBITDA going forward. This is a big deal.
2) They reduced their guidance for capex, from mid-to-high teens as a % of revenue to mid-teens. This will further bolster cash flow - i.e. a 5 pp reduction is equal to about $40mm of incremental cash flow. This is also a big deal.
3) They are seeing strong trend of customers migrating up to more premium HSD product, in line with my thesis, as this drives ARPUs much higher.
|Subject||Re: Re: Re: Re: Re: Big quarter and buyback - fwd estimates WAY too low|
|Entry||05/05/2016 01:37 PM|
TR thanks. I'm very confident you're going to be way too low, but heck, everyone has underestimated the earnings numbers so far, including me.
If you do an internet search, you'll see that programming cost rates seem to be on a calendar year, so my hunch is that the video rate hike the company is about to put through covers costs that are already in the P&L. In that case, we'll see another big jump in EBITDA later this year.
Here's one of several I found. On the conference call, as I recall the analyst said "you guys are last to raise price" and the company agreed... http://www.phillymag.com/business/2015/11/23/comcast-rate-hike/
If the company is sold, I expect a massive premium, but that's just one of several reasons I own the company.
|Subject||Re: Re: Re: Re: Re: Big quarter and buyback - fwd estimates WAY too low|
|Entry||05/05/2016 01:39 PM|
TR we are at about the same as you. Could you share your rev/ebitda grwth numbers and margins?
Honestly I went through with a ruler and calculated the margins from those slides a few months back which is kind of silly but it corresponds pretty closely with what most people have. Here is where I came out:
|Subject||Re: Re: Re: Re: Re: Big quarter and buyback - fwd estimates WAY too low|
|Entry||05/06/2016 09:00 AM|
Sure thing. However, you appear more precise than I do . . . no rulers . . .
Would appreciate feedback as to where I'm missing the boat.
The 2016 growth rates are extrapolated from historic ARPU and customer count growth, and then carried forward from there.
|Subject||Re: Re: Re: Re: Re: Re: Big quarter and buyback - fwd estimates WAY too low|
|Entry||05/06/2016 09:26 AM|
Your model is going to be low for several reasons:
1) You include no assumption for opex/headcount declining, which CEO noted has continued.
2) You assume flat margins for res data and business services, despite near 100% incremental margins on new business and package upgrades.
3) You assume declining EBITDA for res video, even though earnings have been rising there. (See Might's recent comments in the press and on the call).
4) You assume nothing in the way of the pro forma $28mm res video price increase starting in June.
5) You assume no operating leverage broadly as consolidated revenues rise.
Just my 2c. Nothing wrong with being conservative.
|Subject||Re: Re: Re: Re: Re: Re: Big quarter and buyback - fwd estimates WAY too low|
|Entry||05/06/2016 09:29 AM|
I might also note that if capex turns out to be c. 5 percentage pts of sales lower than previously modeled, that's an incremental $40mm of annual FCF. That is a major value driver - it's not just an EBITDA growth story, it's a FCF growth story, and EBITDA is rising rapidly while capex is falling, as major upgrade spends are complete.
|Entry||05/10/2016 10:14 AM|
For those who noticed CEO Tom Might's recent comments about maximizing profitable starts, and eliminating churn and bad debt, this is apparently the service CABO and others use.
A fantastic presentation from April by the President of SubscriberWise. They claim a 5000% ROI for their service, and that they've never had an operator cancel their service. "We're now focusing on customers who can pay."
This stuff is a bit in the weeds of the cable industry, but it is very helpful in understanding why CABO's video profits are rising.
|Entry||05/12/2016 02:43 PM|
Ok, CHTR/TWC/BH is going to close.
CABO's growth and FCF profile is superior. EBITDA running +14% y/y and FCF +35% y/y as capex is falling.
Think we see $700 standalone in next 9-12 months. Lots of people still scratching their heads out there.
|Subject||JPM meeting notes from yesterday|
|Entry||05/24/2016 11:43 AM|
CABO's CEO and CFO did a short discussion at the JPM conference yesterday. Pretty interesting though < 30 minutes. Worth a listen.
A few notes:
- CEO thinks there is room for a lot of growth in CABO's residential HSD penetration. DSL is primary "competitor."
- Commercial is only 11-12% of revs today, wants it much higher. Might says business revenues can be half of total someday.
- Enterprise market offers "tremendous upside" for Cable One, "could be enormous." Less than 1% penetrated now. These are unusual comments for a staid management team.
- CFO on share repos - refuses to characterize/telegraph intentions, as usual. Says "we're bullish on our company, we're bullish on our stock."
- CEO says CABO's HSD and commercial focus is far less capital intensive than the triple play strategy.
|Subject||more on JPM|
|Entry||05/24/2016 01:01 PM|
re JPM meeting notes, they also directly said they wouldnt do M&A that wasnt accretive, and, maybe more importantly, they had no interest in acquiring copper, which is something I have worried about.
|Subject||Re: Re: M&A|
|Entry||05/25/2016 08:00 AM|
Yes, that's right. Super Safe Harbour almost certainly is met here, as discussed in the initial writeup. If right, they could sell the company at any time.
It is also worth noting that CEO Tom Might has repeatedly said "we are followers, not leaders" from a technology perspective. In other words, they are very focused on not screwing anything up.
And, if you're new to the company, it is worth noting that at the spin from Graham Holdings, Don Graham and Tom Might made the conscious decision to collapse CABO's share structure into a single class. There is only one good reason to do that, and that is to signal to strategic buyers that they are open-minded.
|Subject||CHTR's Rutledge: Won't compete with cable cos, wants to buy them|
|Entry||05/26/2016 09:48 AM|
Great article in Wash Post and Multichannel about this. Charter's Rutledge says it will meet its reg obligations by building in areas where the existing broadband provider is a telecom not a cable co.
“When I talked to the FCC, I said I can’t overbuild another cable company, because then I could never buy it, because you always block those,” Rutledge said at the MoffettNathanson event. “It’s really about overbuilding telephone companies.”
|Subject||Re: CHTR's Rutledge: Won't compete with cable cos, wants to buy them|
|Entry||06/22/2016 02:11 PM|
In light of Rutledge's comments a few weeks ago about wanting to buy more cable companies (see #182), and news that Altice is looking for more U.S. acquisitions per Reuters story, it will be very interesting to see how Nomi Bergman's (the President of Bright House and, therefore current Charter executive) role evolves at CABO. Notably, Charter announced its acquisition of Bright House in March 2015, so Graham knew precisely that he was putting a future Charter executive (and a very well-respected and well-connected one at that) on CABO's board, as CABO first disclosed Bergman would be a director in the 4/17/15 Form 10-12B/A filing.
I haven't seen it discussed elsewhere that Charter now officially has a board tie with CABO. It sets up a very interesting situation.
My gut is that Graham would ultimately like to take stock in a sale to limit his taxes and participate in industry growth, and I also guess that he'd be happy with CHTR, CMCSA or ATC depending on price and structure, but perhaps CHTR would have an edge given Buffett's ownership of Charter and Liberty Global and, therefore, high opinion of Malone? Who knows.
Very interesting special situation from both a valuation and governance perspective, particularly with a collapsed one-class share structure.
Stock remains very cheap on a standalone basis, and absurdly cheap in a strategic sale, in my opinion. I frankly try not to think about the synergies available, but obviously they would be huge. (Also, CEO Tom Might is now 64 years old, and he probably would like to cap his career on a high note.)
|Subject||Re: Re: CHTR's Rutledge: Won't compete with cable cos, wants to buy them|
|Entry||06/22/2016 02:39 PM|
HI Cuyler...Are you saying it's very cheap standalone based on $400M in FY17 EBITDA?
|Subject||Re: Re: Re: CHTR's Rutledge: Won't compete with cable cos, wants to buy them|
|Entry||06/22/2016 05:35 PM|
Shoobity - yes, as per my prior valuation commentary.
Slim - I saw the same thing. It's probably sandbagging, particularly given Rutledge's commentary and the fact that CABO's video profits are actually improving. If anything, the opposite strategy is a function of scale and an area of large opportunity in a strategic deal.
Quite a dynamic setup.
|Subject||Re: CABO vs. LBTYK|
|Entry||07/07/2016 03:06 PM|
LBTYK is a completely different animal with enormous financial leverage and lots of moving parts (high debt, wild currencies, acquisitions, capital structure complexity and sovereign regulatory complexity are hard for me with LBTYK, but others probably understand better than me).
I like CABO much better and still think the stock is very cheap. There are so many good things that can happen with CABO that I expect to take the stock far higher than this (earnings growth, awareness, further repurchases, increased dividends, ultimate strategic sale) - it hasn't really appreciated all that much yet. As I wrote down in #163, I see this as a $800-900 stock, which is consistent with what I wrote in the initial writeup.
|Subject||Another fantastic quarter, forward estimates are not even close|
|Entry||08/04/2016 08:18 AM|
For Q2, once again the analysts were not even close, and frankly my write-up projections weren’t even close. It is shocking to the sellside (and most of the buyside) that a niche company that invested a ton of capital to increase its top data speed by 20x is starting to kick profits into gear. The skeptics shake their heads in disbelief as this quantitatively-driven company delivers premium plans to Business and Residential customers, doesn't let the TV companies push them around and grows earnings rapidly.
CABO blew away Q2 estimates and is now run-rating at $356mm of EBITDA (a huge jump from $341mm Q1 run-rate), and which is $31mm more than JPM’s 2017 estimate. $400mm of run-rate EBITDA (which in my writeup was the 2020 estimate) is now only 12% away and the tailwinds are strong. (In my model, $400mm was a 2020 target!)
* EBITDA grew 15% y/y in Q2. The $4.96 monthly video price increase only went in effect in June, so Q3 will have the additional tailwind of roughly +$3.3mm EBITDA above Q2.
* Company reported 2q16 EBITDA of $89mm, far above consensus of $80-82mm, while also beating both revenue and EPS easily. The beats were driven by both rapidly growing Resi and Business revenue, while costs stayed well in check (headcount continues to decline as capex declines and company becomes more efficient, utilizing attrition).
* Resi Data revenues +19% y/y, driven by 3 factors: (i) new customers, (ii) customers upgrading to higher tier packages upgrades and (iii) price increases. Further, new customers normally start on 3-month promotional plans, after which normalized pricing goes into effect. All of these factors will continue to be tailwinds.
* Business Services revenues +12% y/y, driven by the same factors
* I suspect Video profitability has continued to increase as well (nobody ever seems to notice or mention that!).
* ARPUs up across the board strongly (HSD, Video, Voice, Business). As I noted above, this is both customer package upgrades and price. With top-tier data speeds having increased 20x (from 50Mbps to 1Gbps), package upgrading is a trend with a long and strong tailwind, and CABO is also able to capture price, because they sell a premium product with minimal competition at their huge data speeds. If you only need 5Mbps, stick with DSL, but if you want a premium product, you upgrade to CABO. As predicted, the widening delta between CABO’s premium service and the crappy DSL service is driving demand, as is the broader trend towards demand for faster internet with larger data packages for streaming.
* Meanwhile, the company’s rapid growth in Resi HSD and Business Services has now overtaken the intentional top line decline of TV, and the company grew consolidated top line by 1% for the quarter. This happened long ago in profits, but is now occurring in revenues. This is very significant turning point. As CEO Tom Might said, “Our revenue growth has turned positive, and our Adjusted EBITDA margins are among the best in the industry as our higher margin products have shown double digit revenue increases and video no longer dominates our revenues.”
* One thing that almost everybody is missing with CABO is the huge growth that is starting to occur in Business Services. Penetration in business/enterprise is tiny (single digits), it is growing very fast, and the competition is weak (legacy DSL). Contribution margins are huge. This $100mm of run-rate Business revenue is going to grow enormously, in both penetration, data package upgrades and pricing. My guess is that Business HSD generates 90%+ contribution margins.
* CABO bought back another 26k shares ($11.9mm) at an average price of $459 in the quarter, driving accretion to shareholders. Management knows the stock is cheap.
I expect one day, (perhaps sooner than later?), a large strategic with a far lower cost structure (both in programming costs and G&A) will pay a huge premium here, as the stock is very cheap on a standalone basis. It has only appreciated 16% from its when-issued trading of $450.
On a standalone basis, the stock is worth $700-800 on 2017-2018 numbers, and in a strategic deal we're easily at $800-900.
The Graham family spun this off and collapsed the two share classes into a single class for a reason.
In the interim, I love the growth and execution here.
|Entry||08/04/2016 10:37 AM|
how much of 19% increase in data revenue was due to price increases?
what multiples are you using for your price range targets?
|Entry||08/04/2016 11:30 AM|
As they noted in the press release and on the call, revenue growth was driven by 4 factors:
1) More customers
2) Existing customers moving to more premium packages
3) Less discounting
4) Price increases
There is an ongoing uplift as new customers come on, because after the first 3 months at a discounted rate, pricing reverts to regular rate which is ~57% higher (online, you can see that for 100Mbps, the $35 intro rate becomes $55 after 3 months).
Based on the conference call, it sounds to me like the next HSD increase is probably coming in 2017, as they would only say that there are no additional HSD pricing hikes planned for the balance of 2016. For the speeds, CABO's existing pricing is far below that of other cable providers on an apples-to-apples basis, so plenty of room to move up.
|Subject||More on HSD pricing|
|Entry||08/04/2016 11:54 AM|
Further to the point of CABO's likely coming price increase (guessing early 2017) and the large amount of headroom they have to raise prices, Bright House for instance charges $92/month for 100Mbps, compared with the $55 that CABO charges.
In other words, that is $37/month or 67% more than CABO's price for the same speed.
The math is powerful. For every $5/mo HSD price increase add $30mm+ of EBITDA.
|Subject||Re: More on HSD pricing|
|Entry||08/04/2016 01:38 PM|
Is Bright House is really a fair comp in terms of the customer base? I know they are big in FL, but not sure what their cust. mix looks like there on more granular basis.
|Subject||Re: Re: More on HSD pricing|
|Entry||08/04/2016 01:46 PM|
100 Mbps is 100 Mbps, regardless of where you are. Similarly, Time Warner charges $65/mo for only 50Mbps, and $55/mo for only 30Mbps. https://www.timewarnercable.com/en/plans-packages/cable-internet.html?iid=hppromostrip:1:1:shop-offers
So, for the same price you pay at TWC for 30Mbps, you get 100Mbps at CABO.
This is one of the most misunderstood things about CABO's pricing - they are currently priced dramatically below the market, which gives them tons of room for growth.
Again, CABO just took their max speeds up 20 fold from 50Mbps to 1Gbps. Realized pricing is going to rise accordingly.
|Subject||Re: Re: Re: More on HSD pricing|
|Entry||08/04/2016 02:28 PM|
Dont disagree w your overall thesis, so we're really disagreeing on the pace/size of the opportunity - I don't agree that pricing is equivalent nationally - disposable income levels are a lot higher in metro NY than in rural Idaho (I suspect) -
Also, not sure it's apples to apples given TWC, CMCSA, or in my case Fios, are pricing to encourage the triple play - so HSD as part of a bundle is cheaper - I have priced this out from time to time - basically I would be paying the expensive number you cited for stand alone HSD, but I can get the bundle for about the same price - so if I include some value for video and phone, I'm prob. $30-$40 below the headline number for stand-alone HSD.
But I'm a holder here, so hopefully you're right and I'm wrong.
|Subject||Re: Re: Re: Re: More on HSD pricing|
|Entry||08/04/2016 03:19 PM|
Disposable income has almost nothing to do with pricing for Internet service, just like it has nothing to do with the pricing of an iPhone or a hamburger or health insurance. It is what it is.
Besides, very very few people in the U.S. have ANY true disposable income - life is a serious of choices as to how they spend what income they have, and the Internet is now pretty close to becoming #1, and high speed internet is very inelastic, as once you have it, it's very hard to go back to slower speeds. If you stop paying your mortgage, it will take the bank 3 years to kick you out, but if you stop paying your cable bill, they'll shut you off in 30 days.
CABO is aggressively low on price now, executing a "land and expand" strategy. I am very confident realized pricing is going to rise a lot from here as packages move up and 2017 price increases go through.
|Subject||Re: Re: Re: Re: Re: More on HSD pricing|
|Entry||08/04/2016 03:42 PM|
Since you mention hamburgers, I think you'll find prices here are roughly correlated to income, with outliers like Juneau
Anyway, think at this point getting a bit off topic. I agree CABO a good story.
|Entry||08/08/2016 01:02 PM|
Yeah, thanks for reminding me to post on this. It is hilarious how bad the sellside is on this name.
The good news is CABO should continue blowing away estimates for the foreseable future.
As for tailwinds, I confirmed with the company that there was only roughly 2 weeks worth of the June video surcharge in the Q2 numbers (billing cycles end on various days through the month), so call that a $9.0-10.0mm tailwind to 2H EBITDA over 1H, in addition to the other factors. (i.e. this is a new bump up we have yet to see, and cost structure was already in Q1-Q2 as I understand it).
Judging by the fast pace of price increases I'm seeing in my own HSD Internet bills, I expect we'll see the next HSD price increase early 2017, which is only a few months away now.
2017 should be a huge year, and possibly also the year of a sale. We shall see.
|Entry||11/03/2016 10:08 AM|
Decent earnings, with $87mm of Adjusted EBITDA. I had expected them to hit $90mm this quarter, but it appears that a 9,500 sequential decline in Resi Video subs prevented this from happening. It is certainly possible the June surcharge caused this result, which was the first sequential decline in EBITDA since the spin. Business HSD adds of 1,200 continues to be the highlight.
The company did not repurchase any stock in the quarter for the first time.
In the adjustments is a $2.5mm addback for "Acquisition-related costs" that is new. Seems they are probably working on an acquisition, which I had hoped they would not do.
The call is at 11:00 ET.
|Subject||Re: Q3 earnings|
|Entry||11/03/2016 11:51 AM|
Post-call, it sounds like they actually did repurchase some stock in Q3, even though it wasn't in the press release. I didn't catch the exact amount but thought he said $9mm? (update, thanks Wavelet, just saw your post)
They would not discussion their acquisition targets.
|Subject||Re: Re: Q3 earnings|
|Entry||11/03/2016 12:19 PM|
What I think everyone wanted and expected was a clean, aggressive buyback financed by taking leverage up to 3x+. They were slow to buy back stock out of the gate and now are paying much more for it, while apparently looking at acquisition(s). They easily could have bought back 10-15% of the company by now in the 400s and started prepping a sale.
Also appears they are getting some new fiber competition in Fargo, their #5 market, though this is probably not a big deal in the grand scheme. http://www.inforum.com/business/4146207-midco-installation-80-percent-complete-will-soon-join-cable-one-providing-gigabit
This is a good management team of honest guys, yet from my standpoint, they have started to send some mixed signals regarding pricing, acquisitions and trajectory. $2.5mm is a lot of dough to spend on "acquisition related expenses" in 3 months.
|Subject||Re: Re: Re: Re: Q3 earnings|
|Entry||11/03/2016 01:46 PM|
On Capital Allocation. I think the management sent a wrong signal right before the spin off. In the June 2015 slide deck management was talking about 3x leverage as an optimal level ("plus or minus a half turn"). They also ruled out "major bolt-on cable systems acquisition in near-term" while promising to "seek opportunities that fit well with focus on Residentail HSD Servcies and Business Services". So some (myself included) thought that they will be doing a massive buyback quickly. Then they moved very slowly with the buyback and as Cuyler pointed out missed an opportunity when a stock was on firesale. Management also started mentioning M&A more and more often. A clever M&A deal can create lots of value and a bad one can destory. So this boils down to whether we think management is smart and intelligent not to overpay.
Revenue trajectory. Based on the questions asked by sellside, they are trying to figure out how the revenue trajectory would looke like: positive or negative. Video is likely to keep declining (though I hope at decelerating speed) while how much growth HSD would should is an open question. Probably, 1.5% increase in subs, maybe another 1% - 2% favorable impact from the mix shift will get use to 3% - 4% range, which is likely not enought to offset the declining video revenue. Hence everybody was drilling down on rates hikes going forward. I get Cuyler's argument that his cable bill has been going up almost every yeaer (mine has been too!). But when today the management said "last year was our first hike in the last 5 years", it felt as if they were saying "do not model 5% rate increase every year, guys". I appreciated the sensitivity of the topic and would not expect management on a call to say "we have pricing power. we can increase rates 5% every year for the next 5 years and will do it" since it is just an open invitation to get into troulbe. So what do you guys think on rates going forward? Are you reading it differently?
|Subject||Re: Re: Re: Re: Re: Q3 earnings|
|Entry||11/03/2016 02:20 PM|
Ares, I generally agree with all of your comments. I wouldn't waste your time writing to the CEO - the Grahams own a lot more stock than you do, and this is still essentially their company, despite the single share class.
Not doing a debt deal early on in the most incredibly strong HY market of all time was a whiff in my opinion, even if they weren't sure what to do with the money. I'd have said use it all to reduce the float as much as possible, but they chose not to for some reason, and instead have bought back only 2.9% of the shares in 15 months.
Nevertheless, the price appreciation here has been substantial, as cost basis of pre-spin shares was $279 and you could buy pretty much all you wanted in the $300s in the first Q of trading (3q15).
The mental gymnastics for me have always been trying to figure out how different the future is likely to be compared with market expectations. Historically, that has been a wide gap with CABO. Now, I am starting to wonder if we've shifted the other way. Wells, for example, was at $371mm of EBITDA for 2017, which is $93mm/qtr (at least prior to this latest earnings report, which was $87mm).
My worry with the acquisition talk is that they decide they aren't going to sell in the short-term and instead are going to try to get bigger with "accretive" tuck-ins, which could have the effect of reducing the multiple to one more in line with larger comps. That said, these guys are very good managers and their operational execution has been pretty flawless so far.
|Subject||Re: Re: Re: Re: Re: Re: Q3 earnings|
|Entry||11/03/2016 02:43 PM|
I think we are on the same page.
Disclaimer: It was Wavelet who was consdering sending a letter, not me :)
Thank you for keeping the discussion vibrant, Cuyler.
|Subject||Re: Re: Re: Re: Re: Re: Q3 earnings|
|Entry||11/03/2016 05:42 PM|
fwiw I think cable will be a big beneficiary of 5G based on our research. 5G is very different from prior generations of wireless. It's akin to wifi - by using high frequency spectrum (3-30 GHz) you gain bandwidth but lose propagation. Each small cell needs a high speed fixed line backhaul (only fiber or cable plant will suffice). When you look at the distances that this range of spectrum propagates, we are talking hundreds of feet not thousands. In dense urban areas this will be relatively easy because installed fiber is ubiquitous (in central business distrincts) although you'll still need to run fiber to actual small cell locations which will still require a fair amount of expense. When you get to suburban areas (where all the people who use cell phones live), there is simply no fiber plant in these areas. 5G will rely heavily on cable for backhaul in suburbia. I think this is why Comcast and Charter are entering wireless - they basically are already in the business (70% of data on a cell phone already moves across cable wires) and they can wholesale Verizon's 4G network for voice and the 30% of the data that they can't route through their own network. As cable densifies more wifi hotspots these will function as high frequency spectrum radios (2.5GHz or 5.0GHz) and will further offload data/voice away from Verizon and onto their network.
If you want to know what 5G will look like, you are already seeing an early form of it with your home wifi. It's a 5GHz "small cell site" that transfers all your data and video at high speeds. Eventually that will include voice as well.
|Subject||Re: Re: Re: Re: Re: Re: Re: Q3 earnings|
|Entry||11/03/2016 05:59 PM|
jseo1123, this is super interesting. If appropriate to ask, would you mind sharing sources (white papers, etc) that you have studied? Or was it mostly expert calls? Thank you. Ares
|Subject||Any thoughts here?|
|Entry||01/06/2017 04:27 PM|
MoffetNathonson downgrade and sell side thinks minimal ebitda growth this year. On back of profit taking on big run and highest multiple in group. Maybe decent entry here. Any thoughts?
|Subject||Re: Any thoughts here?|
|Entry||01/07/2017 12:47 PM|
hb190 - saw an article regarding the Moffett note, but didn't see the note itself. I have seen all his prior notes, and he has been very bearish and closed-minded on CABO's strategy since the beginning, so this latest report should not be surprising. I'm not sure I understand the difference between his hold and sell, since his price target has been well below the stock price since the spin.
Moffett's reasonable point seems to be that most of the big synergies come in programming costs, and such costs are becoming a lower portion of CABO's expense base, therefore reducing potential synergies to an acquirer. While this is mathematically true on the surface, it does not appear to consider the likelihood that a larger owner with lower rate card could price video more attractively, thereby adding back lost video subs.
That said, my thoughts are the same now as they were in #209 below following Q3 earnings. CABO has been a nice one, but I can't help but think that if any of us were driving capital allocation, we could have made this a huge win by buying back stock aggressively from Day 1 when global rates were zero, retiring the full 20% of the shares out, which arguably could have been done $150+ cheaper than the current price (they could have bought in a lot before the big price increase, which they obviously knew was coming), shrinking the float to a relatively tiny amount, and selling the company to CMCSA, CHTR or Altice. I understand and like conservatism, but they largely whiffed on a remarkable share shrink opportunity here in my view. Being that they were true believers in the strategy, a big/fast buyback would have been the ultimate opportunistic move for them.
On an unlevered basis, since the spin, run-rate EBITDA has risen from $302mm to $358mm, so about +19%. TEV has risen from $2.8bn to $4.0bn, so >40%. The stock has risen from ~$360 to $620, so +70% (+60% at today's price). Multiple expansion explains a lot of the changes, in part because capex has been declining and tax rates are probably declining in the future, as well, so good reasons.
I still think CABO is eventually sold, because to me, Graham would not have spun the asset if that wasn't the thought process. But, they also said they were going to lever conservatively to 3.0x (plus possibly another turn), and they have not, remaining stuck at about 1x. Now, the veteran CEO is retired and replaced, and they are spending money on undisclosed M&A for the first time, so there are probably more unknown variables now than there were.
|Subject||Closing at $597|
|Entry||01/18/2017 04:37 PM|
Now we know why they spent $2.5mm on deal expenses last quarter. CABO is buying NewWave Communication, which itself is a rollup of small cable systems, from GTCR (check their website for acq history). Purch price is $735mm, which they say is 11.5x Q4 annualized EBITDA or 8.4x including the full amount of synergies they expect.
CABO is paying cash and issuing $650mm of new senior debt (which I think they should have done 12-18 months ago when rates were lower to buy back stock).
Given the GTCR was the seller, this deal was surely shopped widely, and (in my opinion) CABO should never be able to pay enough to win an auction.
It is unclear how much of NewWave's business is HSD vs video vs phone, as that data was not disclosed. Capex needs are also undisclosed as far as I can tell.
Looks like pro forma TEV is ~$4.6bn against $406mm of LQA Adjusted EBITDA, so the combined company is trading at ~11.3x pro forma run-rate EBITDA if my math is right.
A few parts of my original thesis worked (pricing growth, EBITDA growth, multiple expansion, modest share repurchase). Several other parts have not (did not lever to 3.0x quickly enough, only repurchased 2% of their stock, CEO retired, did a big acquisition). In their original analyst day presentation, they wrote "Do not anticipate major bolt-on cable system acquisitions in near-term" - apparently 18 months is no longer near-term, as I consider this a major acquisition.
I love cable, but think there are better values out there than CABO given the changing circumstances. With the changing of the CEO and this big acquisition, I would guess a sale of CABO is probably unlikely in the near term.
|Subject||Thank you for prompt updates and keeping the discussion thread engaging|
|Entry||01/18/2017 07:47 PM|
Thank you for sharing a compelling idea, providing prompt update and keeping the discussion very engaging.
|Subject||Re: Re: Closing at $597|
|Entry||01/19/2017 08:57 AM|
Thanks for that background. This transaction looks quite accretive near and long term. Effectively levered up to buy $64mln ebitda less $24mln run rate capex plus $24mln synergies at a cost of $20mln or so in interest and no equity issued. So conservatively $40mln FCF capitalized at 12.0x is about $500mln near term equity value. Just another way of thinking about it other than cuylers pro forma pre synergies ebitda multiple.
Additionally the pro forma growth is higher given NW lower penetration and pricing.
I think Cabo is a big buy here for long term players as the upside from new wave plays out, free cash flow builds, and ultimately company still gets sold. Granted probably not a 2017 event.
|Subject||Thoughts given m&a environment|
|Entry||01/26/2017 10:11 AM|
Given VZ/CHTR speculation, CABO only gets more attractive in the event transaction takes place.
While CABO did not buy back its own stock cheap, it did just lever up to purchase what appears to be a better growth potential asset for <7.0x EBITDA. So actually the equity accretion not to different from the cheaper levered stock buyback, arguably better.
In a way CABO, becomes 'the new CHTR' if CHTR merger occurs. It's a levered FCF US broadband growth story - with no true peers left. And obviously, a takeout of CABO remains inevitable.
Curious if others have thoughts.