After the recent departure of cable industry pioneer Thomas Rutledge to Charter Communications (CHTR), Cablevision Systems (CVC) is undeniably considering takeover solicitations. Analysts downgraded the company with all seven of the revisions to EPS being made downwards for a substantial net change of -5.3%. While Rutledge was a tremendous asset to the company specifically and to the industry overall, this response may have been overblown. I find that the company is still, nevertheless, not attractive at the current price. Employing a multiples analysis and DCF model, I maintain the belief that Comcast (CMCSA) is also a "hold" for now, but a "buy" in the long-term.
From a multiples perspective, Cablevision is the cheaper of the two. It trades at a respective 14.1x and 10.9x past and forward earnings while Comcast trades at a respective 18.2x and 13.8x past and forward earnings. Cablevision also offers a dividend yield that is around 150 bps higher at 4.3%. Time Warner Cable (TWC) trades between the two at 15x earnings and a dividend yield of 3%.
On the third quarter earnings call, Cablevision's CEO Jim Dolan noted that not all of the results were attractive:
"For the third quarter, Cablevision's consolidated revenue grew 8% to $1.67 billion, while AOCF was essentially flat at $539 million when compared to the prior year period. These results were impacted by Hurricane Irene as well as the addition of the Bresnan property. Without these two times, revenue growth would have been essentially flat and AOCF would have decreased 4% for the quarter.
Cablevision generated $440 million in free cash flow from continuing operations over the last nine months of 5% improvement over 2010. In addition, the company repurchased more than 5 million shares in the third quarter and the Board of Directors has approved the quarterly dividend of $0.15 per share payable in December. The impact of Hurricane Irene resulted in an extensive loss of electricity through a significant part of our footprint in the New York metropolitan area."
With significant pressure surrounding operational performance, executive compensation, and management scandal, the company could possibly be an activist target. Billionaire investor Carl Icahn has had a campaign at Time Warner in the past and the emphasis on strategic sales has been his focus of late. His emergence would greatly benefit the auction process and maximization of shareholder value.
Consider that the Dolans have tried twice in the past to buyout the company. Their offers were around double to triple what the current market value is at. With that said, credit markets have become tighter, which would challenge financing. FCF machine Time Warner Cable has $5.6B worth of cash and could be interested in acquiring Cablevision. With Cablevision struggling against competition, particularly Verizon's (VZ) FiOS, taking life in a larger firm would raise optimism.
Consensus estimates for Cablevision's EPS forecast are that it will decline by 17.7% to $1.02 in 2011 and then grow by 19.6% and 37.7% in the following two years. Assuming a multiple of 15x and a conservative 2012 EPS of $1.13, the rough intrinsic value of the stock is $16.95, implying 20.2% upside. If the multiple were to fall to 12.5x and 2012 EPS turns out to be 14.8% below consensus, the stock would fall by 7.8%. This is not the most favorable risk/reward available right now.
Despite the near "strong buy" rating on the Street, Comcast, in my view, is also a "hold" in the short-term (but a "buy" in the long-term). During the third quarter, the company had improved customer metrics for the fourth consecutive time by quarter. Great 13% growth in video, data and voice indicated solid fundamentals. In addition, the 10-year complex agreement with Disney (DIS) for broad programming will help reduce uncertainty. Rising programming costs will keep margins relatively flat as revenue is unlocked elsewhere.
Consensus estimates for Comcast's EPS forecast that it will grow by 18.9% to $1.51 in 2011 and then by 23.2% and 17.7% in the following two years. Assuming a multiple of 17x and a conservative 2012 EPS of $1.77, the rough intrinsic value of the stock is $30.08, implying just 18% upside. Modeling a CAGR of 19.9% for EPS over the next three years and discounting backwards by a WACC of 9% yields an even low fair value figure of $27.51. Investors are recommended to hold out for a recovery.