Capex-heavy cable companies have been crushed recently — Comcast (CMCSA) and Cablevision (CVC) are both down more than 30% since last July. Why? Competition from telcos like AT&T (T) and Verizon (VZ), which are building out fibre optic networks to offer rival digital TV services.
But hold the phone! Sanford Bernstein analyst Craig Moffett paints a fantastic picture for Cablevision’s stock. While CVC will face much more telco competition than other cable companies, Moffett thinks clever financial engineering could drive Cablevision’s stock price to $100 by 2011 (four times today’s value).
Specifically, despite Cablevision taking it on the chin from Verizon et al, Moffett thinks the company will still spew ever-increasing amounts of free cash: $6 billion over the next years, says Moffett, who foresees endless price hikes and capital spending declines despite the increased competition (If this actually happens, it will require a rewriting of some of the laws of economics, but with cable and telco monopolies, anything is possible).
Cablevision’s controlling family the Dolans, Moffett theorizes, will plow this cash into stock buybacks (and continue to load up with debt), thus effectively taking the company private within four years. (The Dolans, you’ll remember, have been stymied in their attempts to LBO Cablevision in the usual way). Non-Dolan shareholders, meanwhile, will go along for the ride, seeing the value of their stock quadruple.
Moffett’s key points:
- The bears are right: Verizon competition is real–especially for Cablevision. Moffett estimates that CVC will have to compete with a telco in about 69% of its service area by 2011, whereas other cable carriers will have to compete with Telco TV in about 40% of their footprints.
- Even with market growth, Cablevision will likely lose 325,000 video subs — about 10% of its subscriber base — to Verizon, et al, through 2012.
- Rampant price hikes and market growth will enable Cablevision to grow revenue 6% per year, with expanding margins.
- Cable capex will fall further. Moffett says cable capex fell from 19% of revenue to 13% of revenue over the past year; expects to drop to 10% of revenue soon, despite Verizon pressure (?).
- Cablevision’s other assets–Rainbow Media, Madison Square Garden, the crappy Knicks–won’t be affected by Verizon.
- Free cash flow will zoom, spewing out $20 per share over the next five years.
- As the Dolan family — which failed to take the company private in October — buys back more shares, cash flow per share will rise.
To celebrate his plan, Moffett hikes CVC 12-month price target to $45, an 83% increase from today’s $24.62 open.
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