In this article, let's take a look at Cablevision Systems Corporation (CVC, Financial), a $5.42 billion market cap company that is one of the largest U.S. cable multiple system operator. It offers Optimum brand cable, Internet and voice services to about 3 million subscribers in the New York tri-state area.
Estimated return
The company announced it lost 34,000 cable subscribers in the fourth quarter, more than the 24,000 estimated by the market.
According to Yahoo! (YHOO, Financial) Finance, the estimated one-year target share price is $18.85, so if you buy shares at current market price which is the same, your return from price appreciation would be 0%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $0.6 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 3.2%. So the total expected return for investing in Cablevision is that one, which we believe is not enough to buy the stock.
Revenues, margins and profitability
Looking at profitability,revenues rose by 3.72% while earnings per share increased in the third quarter compared to the same quarter a year ago ($0.26 versus $0.22). During the past fiscal year, the company increased its bottom line. It earned $0.48 versus $0.25 in the previous year. This year, Wall Street expects an improvement in earnings ($1.14 versus $0.48).
Although Cablevision loses market share, for example with Verizon (VZ, Financial), in the past days, it reported its fourth-quarter net income of $56 million and revenues of $1.63 billion, which met Street forecasts.
The gross profit margin is considered high, is at 51.57%.The net profit margin of 4.79% is ranked higher than 79% of the 980 companies in the Pay TV industry.
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 | 29.89 |
| YOD | YOU on Demand Holdings | -2376 |
| AMCX | AMC Networks Inc. | 93.67 |
| Â | Industry Median | 20.60 |
The ROC is ranked higher than 88% of the 985 Companies in the Pay TV industry.During the past 13 years, Cablevision Systems Corp's highest Return on Capital (Joel Greenblatt (Trades, Portfolio)) was 39.88%, the lowest was -6.22% and the median was 11.25%. It has a current ROC of 29.89% 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.
| Year | ROC (%) |
| Dec-04 | 4.92 |
| Dec-05 | 11.81 |
| Dec-06 | 15.44 |
| Dec-07 | 25.36 |
| Dec-08 | 19.84 |
| Dec-09 | 39.88 |
| Dec-10 | 35.22 |
| Dec-11 | 36.68 |
| Dec-12 | 24.81 |
| Dec-13 | 23.67 |
In terms of valuation, the stock sells at a trailing P/E of17.5x, trading at a discount compared to an average of 22.1x for the industry. To use another metric, its price-to-sales ratio of 0.83x is belowthe industry average of 1.79x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
http://www.gurufocus.com/chart/CVC#&serie=,,id:per_share_eps,s:CVC"> src="http://chart.gurufocus.com/1424900064585.png" />
Shares have decreased about 4% year to date, but it has increased more than 23% in the last year. Further, the company has a pattern of positive EPS growth over the past year.
Final comment
During the past 13 years, the highest trailing dividend yield was 5.47%, the lowest was 0.57% and the median was 3.20%. So now, the stock is trading at an average ratio.
Although the PE relative valuation and the ROC that significantly exceeds the industry average could make me feel bullish on this stock, I would recommend not buying this stock due to its poor return.
Hedge fund gurus like Jim Simons (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) have added this stock to their portfolios in thelast quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
