Spinoff from Graham Holdings allows the company to solely focus on less-competitive rural and non-metro telecommunication markets
Focused on improving operating margins to grow free cash flow and bottom line results
Management plans to pay an annual dividend of $6 per share and use buybacks to boost shareholder value
Cable One Inc. (NYSE: CABO) is a telecommunications company that offers cable television, high-speed Internet and telephone services to over 686,000 customers in 19 states in the South, West and Midwest, and is among the top-ten cable companies in the United States. Additionally, Cable One has partnered with Cable in the Classroom (now titled Cable Impacts Foundation) to provide free cable television to hundreds of schools, and is the only mid-size multiple-system operator (MSO) that has remained independent since 1980.
Cable One’s Spinoff from Graham Holdings Company (GHC)
As part of Cable One’s spinoff from Graham Holdings (GHC), on June 4, 2015, Graham Holdings’ Board approved a 1:1 distribution ratio and declared a pro rata dividend of outstanding shares of Cable One common stock. Accordingly, Graham shareholders on record June 15, 2015, received one share of Cable One common stock for each Graham share held, as a tax-free distribution.
In conjunction with the spinoff, Cable One will complete a $550 million debt offering and use net proceeds to pay a special dividend to Graham. The debt offering is comprised of $450 million in senior notes and $100 million in a senior secured loan facility.
The spinoff gives investors added liquidity and a pure play in Cable One independent of Graham, and allows the company to address business concerns, gives it greater flexibility for acquisitions and capital expenditures, and increases management’s focus on the cable sector.
Shares Offer 20% Upside
Cable One shares began trading ‘when-issued’ (WI) on June 11, 2015, under the ticker symbol CABO WI. As of market close on 6/30/2015, CABO WI was trading at $425.50 per share. WI shares only require a ‘25% of total value’ down payment.
Cable One shares began trading ‘regular-way’ under the ticker symbol CABO on July 1, 2015, and opened the day at $450.80, making the company the highest priced in the cable industry, but closed at $399, down 11% on the first day of trading. As of market close on 7/2/2015, Cable One shares were trading at $399.71, down 8% from the company’s opening price of $433.17 on its first day trading. Analysts estimate Cable One’s market capitalization at about $2 billion, much smaller than its top competitors Time Warner Inc. (TWX) at $72.82 billion and Charter Communications (CHTR) at $19.18 billion.
After market close on 6/30/2015, Cable One was added to the S&P MidCap 400 Index, replacing Peabody Energy Corp. (BTU) which is ranked near the bottom of the Index. Graham Holdings will continue to be a part of the S&P MidCap 400 even after the spinoff.
JPMorgan (JPM) initiated coverage on Cable One with a Neutral rating and a share price target of $476 on single-class share ownership, low telecommunications-based competition, merger and acquisition potential, and growing broadband services. Despite Cable One trading at approximately 9.6x 2016 estimated cash flow, JPMorgan sees upside potential of about 20%.
Cable One expects to establish a quarterly dividend of $1.50 per share, annualized at $6 per share, by Q4 2015 for a 1.5% dividend yield. The company also expects to receive authorization to repurchase stock opportunistically.
#1 Ranked Cable Business
Cable One offers residential customers three services at $35 a month each, without requiring customers to sign a contract and giving them the flexibility to change their services bundle at any time, free of charge. Cable One’s television packages were ranked #1 over DirecTV (DTV) and Dish Network Corporation (DISH). Due to high programming costs, Cable One terminated its contract with Viacom (VIA) in April 2014, causing the company to lose about 20% of its video customer base. Viacom channels include MTV, Comedy Central, Nickelodeon and VH1. While content costs are rising, video contribution margins have steadily declined as customers overwhelmingly prefer new distribution models such as Netflix, Amazon, Hulu, Apple TV and a la carte offerings from content producers such as HBO and NBC.
The company’s top cable Internet package has a speed of 70 Mbps which is faster than CenturyLink (CTL) and AT&T (T). Cable One also offers unlimited free local and long-distance calling, which helped it top customer satisfaction ratings in 2013, 2014 and 2015. Cable One is also recognized for the substantial value of its high-speed data packages that are well below competitors.
In addition to retail services, Cable One offers enterprise solutions to industries such as Auto Service, Enterprise Fiber, Financial, Food Service, Health Care, Hospitality, Insurance and Retail. Enterprise customers enjoy 24/7 network monitoring to ensure continuous high speed Internet delivery without outages. For companies that need to provide customers with news or entertainment, Cable One has packages designed for Lobbies, Business News, Sports Packages and Continuous Music in HD and SD definition. Its phone solutions support up to 10 phone lines with unlimited local and long-distance calling, fax line and all other options residential customers receive, with a fax/credit card line that is targeted at small and medium businesses.
Solid Business Strategy to Capitalize on Rural, Non-Metro Growth
Management is focused on larger, non-urban markets to expand its presence. Currently a majority of Cable One’s customers are concentrated in just 5 states. The company hopes expansion will give it more of a competitive advantage. Cable One is actively addressing video disruptions to acquire more residential video customers, a segment that has been on the decline over the last year. Additionally, Cable One is looking for new ways to increase its land-phone customer base through more competitive prices and increased benefits. Residential voice only accounted for 8% of total revenue in 2014. Management expects these actions to boost revenue and margins, and improve long term free cash flow.
Experienced, Capable Executive Team
Thomas Might serves as President and Chief Executive Officer, and joined the company in 1993 when it was originally titled Post-Newsweek Cable. In 1994, Might become CEO of Post-Newsweek Cable and was responsible for all cable systems. He serves on the Board of Directors of the American Cable Association.
Kevin Coyle serves as Senior VP and Chief Financial Officer, overseeing all accounting, finance and investor relations for the company. Coyle brings over 30 years of financial experience and has prior telecom and cable industry experience.
Julia Laulis serves as President and Chief Operating Officer. She joined the company in 1999 as Director of Marketing, Northwest Division. Laulis has held several roles with increasing responsibility within Cable One. She is now responsible for sales, marketing and technology for the company’s three operating segments and two customer service centers. She has over 30 years of cable industry experience.
Q1 Revenue Down 3% On Lower Video Business
For the three months ended March 31, 2015, Cable One had revenues of $202.9 million (down 3%) with $35.9 million in income from operations (down 9%) and $22.1 million in net income (down 9%).
Cable One’s video customer base is down 20% from 524,563 in March 2014 to 421,331 in May 2015 as customers move their viewing to Internet-connected and mobile devices. Residential video and data accounted for approximately 77% of total revenue in FY2014. To respond to this inexorable customer shift, the company has begun prioritizing its product portfolio based on free cash flow potential.
As of March 31, 2015, on a pro forma basis, Cable One had $100.7 million in cash and cash equivalents, $547.5 million in long-term debt and $406.4 million in total parent company equity.
Cable One is a compelling franchise with consistently high marks for customer service over the past three years, a stable albeit declining revenue base but with all the elements to improve market share such as the best value for high-speed data. Moreover, the company understands that its rural and non-metro target markets are slow adopters of technological innovation and plans to offer greater value service bundles, with higher data speeds, to drive rural retail and enterprise expansion and grow revenues and cash flow while keeping expenses and customer churn down. In addition to growth prospects, shares will offer a 1.5% dividend yield around the end of 2015 when management initiates dividend payments. So the company offers compelling growth and the prospect of dividends and dividend growth.