A few managerial mistakes for Cablevision Systems (NYSE:CVC) has irrationally hindered value creation. The broadcaster and cable operator is rated merely a "hold" on the Street, but has strong fundamentals that merit it trading at a takeover premium. Based on my multiples analysis, DCF model and review of the fundamentals, I find that Cablevision will outperform larger rival Comcast (NASDAQ:CMCSA).
From a multiples perspective, Cablevision is the cheaper of the two. It trades at a respective 15.4x and 12.2x past and forward earnings while Comcast trades at a respective 19.5x and 13.6x past and forward earrings. To put this under a larger context, consider that Cablevision is valued at nearly half of its 3 Digit Group PE multiple. At the same time, the firm is also committed to returning free cash flow to shareholders and has a dividend yield that is 170 bps higher than that of Comcast at 3.9%.
At the third quarter earnings call, Cablevision's President and CEO Jim Dolan noted:
"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…
Not all of our results in the quarter are where we want them. By many measures, we have built the most successful cable television company in the nation and have set nearly every industry benchmark for sales, customer retention, penetration and financial performance. Continuing to build upon, this historical performance has become more challenging in a highly competitive environment, which is compounded by economic pressures including a significant decline in housing activity. However, we are addressing the challenge and in many ways have been preparing for it for several years."
Third quarter results were disappointing with greater-than-expected costs offsetting the focus on subscriber additions. The negative reaction to the departure of COO Tom Rutledge has been been equally overblown. Strong marketing and top products have transformed the company into a top cable business and these strengths are still present today. Greater buyback activity and dividend increases have further showcased management's confidence about the fundamentals. With exceptionally profitable cable operations, the company may also be bought out given its accretive value to larger corporations.
Consensus estimates for Cablevision's EPS forecast are that it will decline by 33.1% to $0.83 in FY2011 and then grow by 44.6% and 30.8% in the following two years. Modeling a three-year CAGR of 8.2% for EPS and then discounting by a WACC of 9% yields a fair value figure of $20.07, implying 30.6% upside.
Comcast has already had much of its upside potential factored into the price. The firm recently signed agreements with Disney (NYSE:DIS) and Verizon (NYSE:VZ), which helps secure a sustainable stream of free cash flow with some of the strongest brands today. Comcast benefits from economies of scale and a management team equipped with deep industry knowledge. Strong financial shape and free cash flow generation further raise the possibility of a more aggressive capital allocation policy. On the other hand, subscriber growth is likely to significantly slow unless ARPU trends pick up.
Consensus estimates for Comcast's EPS forecast that it will grow by 17.7% to $1.86 in 2012 and then by 16.7% and 18% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $31.95, the rough intrinsic value of the stock is $31.95, implying 9.5% upside.