Is Cable One A Great Long-Term Investment?
Cable One has a relentless focus on rural cable systems in 19 states in the United States.
Why Cable One's competitors focus and video and voice services the company is moving away from these services. Cable One is willing to raise prices and let the chips fall where they may. This contrarian strategy is dependent on the company's unique circumstances of its customers base. Cable One doesn't believe that traditional pay-tv can be profitable. The company is unwilling to allow its cash to be eaten up by programming and retransmission cast.
Since 21012, Cable One has seen a 24% drop in its video customers. The company is willing to do the taboo and loss customers instead of offering video and voice service at a loss like the rest of the industry. Cable One feels so strongly on this that it plays hardball with programmers pushing for price increases and even being willing to walk away from. This has resulted in the company no longer broadcasting Viacom and its bundles of channels.
Cable One over the past three years introduced rigorous analytics to determine the expected life time value of a current customer or a future one. The company focuses its sales and marketing on residential customers with a high Lifetime value. Cable One has been able to use this strategy to to change the pool of its customers base the last few years. This has aloud the company to make higher profits fewer customers and PSU subscription. Cable One though its strategy has reduced low lifetime value customers which results in lower churn, bad debt expenses and other cost.
Cable One has used its increased profits and cash from its higher valued customers to reduced its debt by 60% from 2012 to 2014. This has also lead to the company having the lowest operating expenses per customers in the industry. Cable One has been able through its lifetime value approach to maintain competitive operating margins and increase operating efficiencies as well. Unlike its competitors Cable One doesn't waste millions in development of new technology. Instead the company waits until new technologies have proven themselves and available at more favorable terms to Cable One.
The company his a very discipline capital allocator that refuses to waste capital like most of its competitors. Cable One has been able to produce returns on capital and equity of 27% and 17%. However all of this free cash flow has to be reinvested in opportunities that offer similar rate of returns. The company doesn't seem to have many reinvestment opportunities available to it. Cable One has announced that it will pay out a 6% dividend to shareholders. On the other hand with all of this free cash flow should result in a large share repurchase plan. The company could by 2018 on its current free cash flow buy back 28% of its outstanding shares. A 27% deduction in shares outstanding would result in shares trading at $563/share.
Cable One is a unique cable company that operates in a way that the rest of the industry doesn't. This has resulted in the company producing above average return on lower over all operating cost on a per customer basis. I believe that Cable One is a great long-term investment at its current price. The company is selling for over 10x its operating earnings and 17x its earnings. At its current price you are paying 5x asset value for Cable One. Paying 5x asset value is something no value investor who every pay, however, Cable One is one of those companies that operates with a competitive advantage in a niche market with little to no competitors. The company is clearly creating more value than appears and its reasonable to pay 5x asset value for a company that returns 11.76% on assets.
Published on Oct 12, 2015By Cody Eustice
Posted in ...Market Commentary