CABO - Cable One

[racemize]

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

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

Packer

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

[Munger_Disciple]

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

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

Packer

+1

[Munger_Disciple]

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

I am not Packer, but here are my thoughts.

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

[cmlber]

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

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

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

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

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

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

[cmlber]

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

I am not Packer, but here are my thoughts.

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

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

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

[Munger_Disciple]

Maybe you've done that and concluded 10x EBITDA is rich (if so, I take back the "arbitrary" comment and we can agree to disagree)

I have looked at CABO in depth along with several other companies in the cable space, and concluded that I would rather own others given the current valuations.

To each his own

[Packer16]

Isn't an issue with CABO that at a 4% (3.7% by my calcs) DFFCF/EV, that any debt rate above 4% becomes dilutive & thus leverage is of little use here and you are dependent upon the growth to grow value?  The company may not go bust but at a 3.7% FCF yield there is a good amount of growth in the number already. 

If we look at Cogeco as another mid sized cable co, they currently have a FCF yield of 5.3% Comcast is 5.7%.  At the current price, CABO has grow 2% more implied growth forever than Comcast.  That is baked in so any appreciation is making a bet that CABO can grow unlevered CF by more than 2% greater than Comcast.  I agree there is some Alaska risk with GNCMA (which will reduce the historical CF growth of 10% per year) but with CABO IMO you have more pricing risk.

Packer

[cmlber]

Isn't an issue with CABO that at a 4% (3.7% by my calcs) DFFCF/EV, that any debt rate above 4% becomes dilutive & thus leverage is of little use here and you are dependent upon the growth to grow value?  The company may not go bust but at a 3.7% FCF yield there is a good amount of growth in the number already. 

No for two reasons.  1) The 4% is after a 39% tax rate.  Pre-tax the yield is 6.5%, they can borrow cheaper than that.  2) If you buy a 20 year zero coupon bond with a YTM of 10%, and finance it with 20 year debt at 7%, won't the IRR on your equity go up even though it is "dilutive" for 19.9 years? 

If we look at Cogeco as another mid sized cable co, they currently have a FCF yield of 5.3% Comcast is 5.7%.  At the current price, CABO has grow 2% more implied growth forever than Comcast.  That is baked in so any appreciation is making a bet that CABO can grow unlevered CF by more than 2% greater than Comcast.  I agree there is some Alaska risk with GNCMA but with CABO you have pricing risk.

I think it's very reasonable to anticipate 2%+ higher growth for CABO vs Comcast.  Comcast has 42% HSD penetration vs 31% for CABO.  Comcast HSD prices are ~20% higher than CABO's per Mbps.  Price is 100% incremental margin.  Comcast EBITDA is more at risk long term if cord cutting accelerates.  Comcast HSD pricing power is also likely much lower given higher fiber overlap and denser markets which will make it easier to deploy next generation technologies to compete with cable.  I'm much more confident projecting out 20 years into the future for a rural cable operator with no video business than I am for a non-rural cable operator with a large video business.  I think you need to project out that far to want to own either CABO or Comcast.  So even if I thought CABO would grow only 1% faster than Comcast in perpetuity, I'd rather own it because I have a lower hurdle rate when I think the future is clearer. 

Can't comment on Cogeco, haven't looked at it.

[Packer16]

You are correct on the debt as they do have a good amount taxes that they could shield.  My main point is 3.7% FCF is not cheap unless there is a good amount of growth compared to some other alternatives.  If you look at the comps they all trade at higher FCF yields & maybe they should based upon the factors you have brought up, however, there is already a 2% lower yield or almost 50% premium in the pricing for those factors, so, the bet in buying CABO is that the premium should be higher.  I wish you the best but I am not a growth investor so this is out of my circle.

Packer

[rishig]

You are correct on the debt as they do have a good amount taxes that they could shield.  My main point is 3.7% FCF is not cheap unless there is a good amount of growth compared to some other alternatives.  If you look at the comps they all trade at higher FCF yields & maybe they should based upon the factors you have brought up, however, there is already a 2% lower yield or almost 50% premium in the pricing for those factors, so, the bet in buying CABO is that the premium should be higher.  I wish you the best but I am not a growth investor so this is out of my circle.

Packer

The headline number of 3.7% FCF is not representative of their earning power for two main reasons:
* CABO is under earning. It's product is currently priced much lower than comps. Data ARPU as of last quarter is $61. GNCMA, an alaska based comp, has DSL based model ARPU at $85. $85 for dsl and $61 for fiber!
* CABO rolled out the 100 Meg product in Q4 '15 and is rolling out Gig in 2016. Their capex has been much higher than normalized capex.