2023-08-24 13:57:24 ET
Summary
- Cable One, Inc. continues to report quarterly adjusted EBITDA margin increases, focusing on higher margin products.
- The company's business model is centered around providing connectivity and entertainment solutions for residential and commercial customers.
- There are risks associated with the speed of introducing new technologies and the level of debt, but the company is currently undervalued.
Cable One, Inc. ( CABO ) continues to report quarterly adjusted EBITDA margin increases y/y as management is focusing on higher margin products. In this regard, I am quite optimistic about the long term growth business models based on residential data and business data customers. There are also some risks from speed of introduction of new technologies, failed new products, or total amount of debt. With that, I believe that Cable One, Inc. currently trades at a bit undervalued.
Cable One, Inc.
Cable One, Inc. is a leading broadband communications provider that is committed to connecting its customers and communities. Its focus is on providing a hassle-free experience through solutions that improve the lives of its clients, maintaining a personal and close treatment as neighbors and local partners.
Powered by a robust fiber infrastructure, the Cable One family of brands offers a wide range of connectivity and entertainment services, including Gigabit speeds, advanced Wi-Fi, and video. In addition to serving residential customers, it also provides scalable and cost-effective solutions for businesses of all sizes, thus driving economic growth in non-metropolitan markets. It has a significant presence in seven US states, serving more than 1.1 million residential and business customers.
Source: 10-k
Cable One's business model is focused on providing connectivity and entertainment solutions for residential and commercial customers, taking advantage of its fiber infrastructure to expand and compete in the market. In 2022, Cable One, Inc. generated the majority of its revenue through three primary product lines. Residential data accounted for 54.8% of total revenues, followed by residential video at 19.1% and business services at 17.9%.If we take into account that Cable One, Inc. continues to deliver Adjusted EBITDA margin increases and quarterly Adjusted EBITDA growth y/y, I believe that it is a great moment to review carefully the activities of Cable One.
Source: Quarterly Press Release
Balance Sheet And Contractual Obligations
As of June 30, 2023, the company reported cash and cash equivalents of about $160 million, with accounts receivable close to $74 million, prepaid and other current assets worth $79 million, and total current assets close to $314 million. The ratio of total current assets/current liabilities stands at more than 1x. Liquidity does not seem to be a risk here.
Besides, with property, plant, and equipment of about $1.736 billion, intangible assets worth $2.630 billion, and goodwill close to $928 million, total assets stand at $6.882 billion. The asset/liability ratio is larger than 1x, which means that the balance sheet appears solid.
Source: Quarterly Press Release
I believe that investors may do good by studying carefully the total amount of debt, which is not small. Liabilities include accounts payable and accrued liabilities worth $146 million, deferred revenue close to $28 million, current portion of long-term debt of about $19 million, total current liabilities worth $194 million, and long-term debt of $3.731 billion. Total liabilities stand at $5.115 billion.
Source: Quarterly Press Release
Cable One assumes certain contractual obligations as part of its operations. Programming purchase commitments are agreements with television networks and broadcast stations to provide programming services to its subscribers. Lease payments include obligations related to finance and operating lease agreements. In addition, there are debt payments for the outstanding debt instruments.
Other purchase obligations include binding commitments related to capital projects and other legal commitments. They also incur additional costs, such as renting space on utility poles and fees imposed by government authorities. In addition, they have franchise agreements that require bonds or letters of credit to ensure performance, but do not expect these contingent commitments to result in additional payments.
Source: 10-k
Competition
It seems to me that Cable One operates in a highly competitive and constantly changing industry. Its competitors include DBS providers, telephone companies with data and video services, municipalities and cooperatives with fiber-based networks, regional fiber providers, and other competitors in the geographic markets.
The company also faces increasing competition from wireless phone companies, wireless Internet providers, and online entertainment services like Netflix (NFLX), Disney+ (DIS), and others. While it maintains a strong competitive position in many markets, it recognizes the importance of continuing to improve its infrastructure and focus on higher growth and higher margin products and services to maintain its success in the industry.
Market Expectations Include Net Sales Growth, FCF Growth, And EPS Growth
I believe that it is worth having a look at the expectations of other analysts because they are quite beneficial.
2025 net sales are expected to be close to $1.713 billion, with 2025 EBITDA of $961 million, 2025 EBIT close to $594 million, and 2025 net income close to $291 million. 2025 free cash flow would stand at close to $324 million.
Source: S&P
I usually do not use past figures to understand the future of businesses. Hegel says that we learn from history that we do not learn from history. With that, I believe that Cable One will most likely not report numbers very far from those reported in the last 9 years. With this in mind, it is worth noting that the company reported stable net sales growth and FCF growth. Considering the stability of the business model, I think that a DCF model would make sense.
Source: Ycharts
Cash Flow
Cable One's business strategy focuses on non-metropolitan markets, prioritizing opportunities for higher growth and margin in residential data and commercial services besides maintaining a culture of cost leadership. Its focus on higher growth products has led to a decreased focus on video and residential voice. I would also expect further investments in infrastructure and new strategic acquisitions, which would most likely enhance capacity, and may bring economies of scale. As a result, under my financial model, I assumed that the company would enjoy some FCF growth for some time.
In my opinion, if Cable One successfully uses data analytics to target higher relative value residential customers besides seeking to optimize relationships with data-only customers, net sales would most likely grow. Besides, it is worth noting that the company tries to target higher margin businesses, which may enhance future FCF margins. The following lines are from the last quarterly report.
We focus on growing our higher margin businesses, namely residential data and business services, rather than on growing revenues through maximizing customer primary service units. Source: Quarterly Press Release
I am quite optimistic about the business model based on residential data and business data customers. The company believes that these two offerings will most likely grow over the long-term. I also included this assumption in my cash flow model.
We have experienced significant growth in business data customers and revenues since 2013. We attribute this growth to our strategic focus on increasing sales to business customers and our efforts to attract enterprise business customers. Source: Quarterly Press Release We have experienced significant growth in residential data customers and revenues since 2013. We expect growth for this product line to continue over the long-term as we believe upgrades made in our broadband capacity, our ability to offer higher access speeds than many of our competitors, the reliability and flexibility of our data service offerings and our Wi-Fi support service will enable us to continue to grow average monthly revenue per unit from our existing customers. Source: Quarterly Press Release
I also believe that further repurchase of shares will most likely have a beneficial impact on the stock price. The demand for the stock could increase, which may lead to stock valuation enhancements. Take into account that investors may acquire more shares as they see that the company is doing so.
The Company repurchased 60,910 shares of its common stock at an aggregate cost of $41.4 million, representing 1.1% of outstanding shares at the beginning of the quarter, and paid $16.3 million in dividends during the second quarter of 2023. The Company had $159.4 million of remaining share repurchase authorization as of June 30, 2023. Source: Quarterly Press Release
My forecasts include 2025 net income close to $124 million, 2025 depreciation and amortization of about $471 million, and 2025 equity-based compensation of about $34 million. I did not include write-off of debt issuance costs, losses on asset sales and disposals, and losses on sales of businesses because these are extraordinary events.
Also, with equity method investment of close to $40 million, fair value adjustments worth $71 million, changes in accounts receivable close to -$52 million, and changes in accounts payable and accrued liabilities close to -$13 million, 2025 CFO would stand at close to $873 million. Besides, with 2025 capital expenditures worth -$589 million, 2025 FCF would stand at $284 million.
Finally, for the year 2033, I assumed net income close to $142 million, 2033 depreciation and amortization worth $686 million, 2033 non-cash interest expense of $29 million, fair value adjustments of close to $115 million, and changes in accounts receivable of close to -$127 million. Besides, with changes in accounts payable and accrued liabilities of about -$12 million and changes in deferred revenue close to $4 million, 2033 CFO would be $1.364 billion. Also, with 2033 capital expenditures worth -$902 million, 2033 FCF would be close to $462 million.
Source: Cash Flow Expectations
If we assume EV/FCF of 21x, 2033 total FCF of $11379 million, and cost of capital of 6.89%, the implied enterprise value would be about $8.044 billion. My numbers are in line with previous figures reported by management.
Source: Ycharts Source: Ycharts
If we add cash and cash equivalents of close to $160 million, current portion of long-term debt of $19 million, and long-term debt close to $3.731 billion, the firm value would stand at $4.453 million. Hence, we would be talking about an internal rate of return close to 2.26% and a fair price of $792 per share.
Source: Cash Flow Expectations
Risks
Cable One's success depends largely on its ability to adopt and exploit existing and new technologies that meet changing consumer demands, and stand out in a highly competitive marketplace. There is a risk that technology decisions may not be effective, profitable, or attractive to customers compared to the choices of your competitors, which could affect your competitive position and financial results.
The speed of introduction of new technologies by competitors may also be a concern. Likewise, technological advances or changes in the offers of the competition could require additional expenses or adjustments in their products and services. Prudence while adopting technologies and the ability to keep up with advances are crucial to avoid customer churn and financial risk.
My Conclusion
My take on Cable One, Inc. highlights its strategic focus on providing connectivity and entertainment solutions to residential and business customers in non-metropolitan markets. Its business model has proven to be strong, generating significant revenue through residential data and business services. However, there are risks associated with the adoption and exploitation of technologies, as competition in the industry is high, and technological advances can affect the competitive position. Despite these challenges, by focusing on higher growth and higher margin products, I believe that Cable One, Inc. could be trading at close to $792 per share.
For further details see:
Cable One: Residential Data And Business Data Customers Imply Undervaluation