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The Cable Television (OTCPK:CATV) Industry in the US comprises of a large number of both public and private companies engaged in providing an array of services to its customers. The industry seems to be reaching its maturity stage with growth in revenues stabilizing over the past few years.

 

 

in US$ MM

2007

2008

2009

2010

2011

Average

(4-Years)

Total Revenues

78,824

85,255

89,901

93,780

97,598

 

Annual Growth

 

8.16%

5.45%

4.31%

4.07%

7.38%

Source: www.ncta.com

The CATV industry is highly consolidated with the top four companies controlling more than 70 percent of the market share. Comcast Corporation (NASDAQ:CMCSA), Directv (NASDAQ:DTV), Dish Network Corporation (NASDAQ:DISH) and Time Warner Cable Incorporated (NYSE:TWC) are the major players in the industry in terms of subscribers. All four companies have been able to expand their customer base through acquisitions over the years. As the growth in the industry is slowing down, acquisitions and mergers is the only way for these companies to quickly expand revenues locally and also to expand into other geographic locations.

CMCSA is the largest corporation in the industry with more than 22 million subscribers, followed by DTV, DISH and than TWC. The dominance of these companies in this sector has brought my focus to these four companies.

Values in Thousands

(click to enlarge)

Source: ncta.com

Comparative Analysis

 

 

Key Stats

CMCSA

DTV

TWC

DISH

Industry

P/E (NYSE:TTM)

18.30

12.17

13.82

26.93

14.54

P/B

2.23

N/A

3.90

468.77

4.20

P/S

1.76

1.07

1.32

1.21

1.32

Source: Yahoo Finance

Based on the multiples, TWC is the only company that seems to be fairly valued relative to the industry as all three multiples of TWC are equal to or close to the industry averages. DTV is relatively undervalued compared to the industry based on its two available multiples. CMCSA and DISH show a mixed trend, as two multiples for both companies showing overvaluation and one multiple for both companies indicating undervaluation relative to the industry.

 

 

Key Stats

CMCSA

DTV

TWC

DISH

Industry

Rev Growth (3-year Avg)

20.50

11.30

6.20

6.90

8.00

EPS

2.28

4.58

6.9

1.41

4.58

EPS Growth (3-year Avg)

21.90

68.90

31.30

-0.20

-

Source: Morningstar

Based on the above key statistics DTV looks to be performing better than its peers and the average industry. It has a revenue growth greater than the industry, an EPS at the level of the industry average and a growth in EPS far superior to its peers. Although CMCSA achieved the highest revenue growth amongst the comparables in the table but posted a lower than average EPS and a growth in EPS which is generally lower than its peers. TWC has also performed relatively better on the above indicators with high EPS and high growth in EPS compared to the industry, but it failed to achieve high growth in revenues. DISH has underperformed its peers and the industry in all three categories with lower revenue growth and EPS and a negative growth in EPS over the past three years.

 

 

Key Stats

CMCSA

DTV

TWC

DISH

Industry

Asset Turnover

0.39

1.53

0.44

0.99

-

Cap Exp as % of Sales (5-Year Averag)

10.61

11.26

14.47

6.88

-

Operating Margin %

19.50

17.10

20.80

8.60

18.50

Net Margin %

9.90

9.90

10.10

4.50

6.70

Source: Morningstar

DTV has again outperformed its peers in terms efficiency with an Asset Turnover of 1.53, far superior than its peers. This is very impressive considering an average capital spending of DTV over the past 5-years has been 11.26% of its sales.

TWC was able to post Operating and Net Margins of 20.80% and 10.10% respectively, higher than the industry average and its peers but showed a lower Asset Turnover Ratio. DISH has underperformed its peers and the average industry in all the above indicators except in Asset Turnover. However if we consider the small amount of capital expenditures over the years, this figures does not seem to be that much impressive. CMCSA has the lowest Asset Turnover but the company was able to post higher than average Operating and Net Margins.

 

 

Key Stats

CMCSA

DTV

TWC

DISH

Industry

ROA %

3.84

15.13

4.39

4.41

-

ROE %

12.80

N/A

29.10

N/A

18.40

Debt/Equity

0.80

N/A

3.50

307.90

2.60

Source: Morningstar

DTV has the highest ROA compared to its peers but shows negative book value of equity due to huge accumulated losses in the past. TWC has the highest ROE in the above table greater than what was achieved by its peers and the average industry but the company is exposed to high risk as expressed by a Debt/Equity Ratio greater than the industry average. CMCSA has a lower ROA and ROE compared to the industry average.

Valuation

For valuation purpose, I have used a formula derived by the father of value investing, Professor Benjamin Graham. The formula is known as the Benjamin Graham Formula and is used to calculate the intrinsic value of the stocks. The adjusted Benjamin Graham formula is as follows:

Intrinsic Value

=

EPS*(8.5+2G)*4.4

  

Y

In this formula the twelve months trailing EPS is used, "G" represents the long term expected earnings growth and "Y" is the current yield on AAA rated corporate bonds. The constant "8.5" in the formula represents the appropriate P/E ratio for a zero growth company, as proposed by Benjamin Graham and "4.4" represents the average yield on a high grade corporate bond in 1962, when this formula was derived.

 

 

Valuation Matrix

 

CMCSA

DTV

TWC

DISH

AAA Rated Corporate Bond Yield

2.521

    

EPS

 

2.28

4.58

6.90

1.41

Growth

 

17.58%

17.30%

13.04%

5.97%

Estimated Value

 

35.24

70.74

105.55

21.22

Current Price

 

41.72

54.99

95.37

37.97

Expected Return

 

-15.54%

28.64%

10.67%

-44.11%

  

Overvalued

Undervalued

Undervalued

Overvalued

[1] This represents the average yield on AAA rated corporate bond with 10 years of maturity, extracted from Yahoo Finance on March 26, 2013.

As can be seen from the table, CMCSA and DISH are estimated to be overvalued and DTV and TWC are estimated to be undervalued.

Conclusion

Based on the comparative analysis and the calculation of intrinsic value of the stock, DTV and TWC look to perform better than CMCSA and DISH. Both companies exhibit low price multiples, high EPS and EPS growth, high operating and net margins and high expected future growth in earnings. However, DTV has the lowest P/E (12.17x) and P/S (1.07x) multiples, highest ROA (15.13%) and Asset Turnover (1.53), highest EPS growth (68.9%) and the lowest PEG Ratio (0.66). Based on these indicators and an upside potential of 28.64 percent, I would recommend to buy DTV.

Source: Putting Graham To Work In CATV Industry