In this article, let's take a look at Cablevision Systems Corporation (CVC, Financial), a $5.15 billion market cap company, which is one of the largest U.S. cable multiple system operators. It offers Optimum brand cable, Internet and voice services to about 2.9 million subscribers in the New York tri-state area.
A macro view
The company's cable business serves people in the New York-New Jersey-Connecticut metroplex area, as well as parts of Pennsylvania. More or less three million customers are in those areas. More specifically, at the end of last year, it had more than 2.8 million video subscribers, about 2.8 million iO Optimum Online high-speed data subscribers and 2.3 million Optimum Voice customers.
Cablevision focuses on advanced service offerings while becoming an industry-leader due to its market penetration rates. In the Internet service arena, annual subscriber growth has increased but with a minor rate than previous years: only 3% versus 20% seen before.
A major risk
Now, turning our attention to potential risks, we think growing competition is one of the most important. Verizon (VZ, Financial) has invested heavily in FiOS network in order to compete with Cablevision and it is possible that it can gain market share. In addition to Verizon, it also competes with DISH Network (DISH, Financial) and DirecTV (DTV, Financial). In residential data and voice services we must not forget the competition of AT&T (T, Financial).
Cash & dividends
The spin-offs of Madison Square Garden and Rainbow make sense with the new firm´s strategy while generating free cash flow.
Since 2006, Cablevision has demonstrated its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The dividend to an annual rate of $0.60 per share with a current dividend yield is 3.1% which is higher than the dividend yield of the S&P 500 and is enough to protect investors from inflation.
It also set a $500 million stock repurchase plan ($450 million was left as of February 2014).
Revenues, margins and profitability
Looking at profitability, revenues growth by 3.72% while earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.34 vs $0.11). During the past fiscal year, the company increased its bottom line. It earned $0.48 versus $0.25 in the prior year. This year, Wall Street expects an improvement in earnings ($1.05 versus $0.48).
The gross profit margin is considered high, is at 51.58%.The net profit margin of 5.78% is similar to the industry average.
Finally, let´s see a measure defined by Joel Greenblatt (Trades, Portfolio): the Return on Capital, which he analyzed it differently in his book “The Little Book That Still Beats the Market (Little Books. Big Profits).” He defined Return on Capital as EBIT divided by the total of net fixed assets and net working capital.
The formula is: Return on Capital: EBIT/(Net Working Capital + Net PPE – Excess Cash)
So, let´s compare the ROC which is one of the most important measures of the efficiency of a business and should be an important tool for investors.
| Ticker | Company | ROC (%) |
| CVC | Cablevision | 28.95 |
| YOD | YOU on Demand Holdings | -2611 |
| AMCX | AMC Networks Inc. | 132.09 |
| Ă‚ | Industry Median | 20.67 |
The ROC is higher than 82% of the 864 companies in the industry. During the past 13 years, Cablevision Systems Corp's highest Return on Capital (Joel Greenblatt (Trades, Portfolio)) was 44.57%. The lowest was -6.33% and the median was 7.75%. It has a current ROC of 28.95% which is higher than the industry median and the one from YOU on Demand Holdings (YOD, Financial), but less than AMC Networks Inc. (AMCX, Financial).
It is very important to understand this metric before investing and it is important to look at the trend in ROC over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 9.6x, trading at a discount compared to an average of 24.9x for the industry. To use another metric, its price-to-sales ratio of 0.80x is below the industry average of 1.69x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
The company has a pattern of positive EPS growth over the past year.
Final comment
Looking at the future we think the company will continue to grow its revenue base as it increasingly targets of middle sized segment of the commercial market. Positive aspects outlined in the article, plus the PE relative valuation and the ROC that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
