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Knology (NASDAQ:KNOL) is a speculative play on broadband service in the Southeast.

In early June, Nielsen/NetRatings announced that nearly three-quarters of US active Web users connected at home via broadband in May, growing 15 percentage points over a year ago, when just 57 percent of active Web users relied on broadband connections at home. According to technology consulting firm IDC, the US broadband market is expected to grow at a 18.4% CAGR between 2004 and 2009. Broadband penetration is expected to exceed 52% of US households by 2009.

Research also indicates that broadband users are more likely to make better use of Internet functionalities and newer technologies, such as RSS feeds and blogging. "...the market for broadband Internet connection has not yet reached saturation," said Jon Gibs, senior director at NetRatings. "We're past the point where decreasing prices and increasing availability will move the needle for providers; the remaining consumers will be pushed to broadband as the Internet continues to move beyond text-based information to a comprehensive source for video," he added.

Knology is a bundling giant, and leads the cable industry in voice and data penetration rates. Just ten years old, the company has grown primarily through serial acquisitions to become the 20th-largest cable provider in the US in terms of video subscriber count. We like how the enterprise value/subscriber metric is gaining traction, as well as how the firm's net debt/EBITDA multiple is expected to fall in 2H06 and FY07. Note that debt/total cap still remains at less than 70% and there is probably still some risk overhang related to the bankruptcy of Knology's predecessor. With a 19M float and 36% insider holdings, this one could easily pop on a blow-out quarter as more investors flock to obscure (pure) plays on broadband adoption (only 5 analysts cover the stock) and/or management decides it wants to eat more of its own cooking.

Overall, you're looking at a leveraged, money-bleeding firm (negative EPS, but EBITDA positive as of 1Q06) with the wind at its back -- as well as a titillating stock chart -- but this is not a stock for your retirement account: Knology carries a debt/equity ratio of 6.3 and trades for almost 10 x book (shares are up nearly 400% YTD). We'd await further transparency on the firm's balance sheet enhancements before jumping in. For now, we rate this stock a HOLD and only for those with high tolerance for risk.

KNOL 1-yr chart:

Source: Knology Knows Broadband Inside Out (KNOL)