Description

CABO was written up a little over a year ago and has been down 45% since.  The writeup can be found here https://valueinvestorsclub.com/idea/CABLE_ONE_INC/2909742915  .  The writeup contains good background information on the company and info on its equity investments so I am not going to get into that.  Rather, I want to talk about what has happened since and why its down and why now is a much better time time to invest (and not just because the stock is 45% lower, though value is much more compelling).

4Q 2022 was a peak quarter for CABO for both revenue and EBITDA with each successive quarter lower than the previous.  Like most companies, when you show revenue and ebitda declines, especially in the face of expected gains, the stock gets killed.  Having followed Cable for a long time, it is certainly true here as the multiple drops along with the revenue/ebitda compounding the effect of the decline and conversely, when revenue/ebitda rebounds the multiple increases as well.  Add to that the financial leverage and the huge short interest and CABO (or charter for that matter) can have a disproportionate risk/reward.

So what has happened that caused the revenue/ebitda decline and why has the stock been obliterated? 

1. Lower Demand for Broadband:  Coming out of Covid, there was a rush to get broadband resulting in outsized subscriber gains resulting in CABO "over earning" in 2021 and 2022.  Additionally, the low movement of home sales resulted in less people seeking new broadband.

2. Increased competition from Fixed Wireless (FWA): It is well know the massive success of FWA for the wireless carriers.  This has had a double negative effect on cable.  It "stole" the lower end subscribers and put pressure on ARPU.  While CABO did not have a churn problem over the last two years, it made it much more difficult for them to get their fair share of the smaller pie of new subs.

3. Increased competition from Fiber providers:  CABO was the dominant broadband player with very little competition in their area.  Overbuilders and DSL incumbents (who upgraded their systems to fiber) in their areas have been more aggressive over the last 2 years again.  In their latest CC, CABO said that 42% of their markets are overbuilt with Fiber compared to 25% at the end of 2022.

4. Decline in ARPU:  The competition from these new entrants made it more difficult to attain new customers but also caused CABO to "play around" with their pricing and thus reducing ARPU.  Many shorts, rightfully so, shorted on this commentary earlier this year, as this strategy just put more pressure on the top line

5. Overhang of MBI: the remaining 55% of MBI that CABO does not own will likely be put to CABO late next year, resulting in them buying MBI at an inflated price.  Consensus is that this will cost them around $720 million to buy the 55% stake which is probably overpaying by $320 million.  Additionally this would likely result in the writedown of their current investment in MBI by $250 million resulting in $570 million of lost value

So why will this all change? How will CABO turn the ship and start growing revenue EBITDA again?

1.   Much like the "pull forward" of Subs during COVID, currently, CABO's sub base has underperformed because of the "pull forward" of subs to their new competitors.  The FWA and Fiber overbuilders have given out great promotions in the last 2 years.  These promotions periods have started to run out which makes for a more fair playing field for CABO.

2. FWA have capacity constraints: FWA is able to take immediate market share when they enter a market, however, they hit their capacity constraints fairly quickly and just don't have the ability to increase penetration in a market.  going forward, I expect CABO (and all cable co's) to get a much bigger share of new broadband adds

3. ARPU journey has ended:  Shorts jumped all over CABO when it began its ARPU journey earlier this year.  However, as announced on the last conference call, the expectation is for ARPU to remain flat in the 3Q and perhaps start growing thereafter.  CABO brought down its ARPU, but at current levels they feel they can compete effectively.  As such, I expect for ARPU to be slightly lower in the 3Q, flatten out in 4Q and start to grow again in 2025

4. Lower Rates: with interest rates finally being lowered and with forecasts for a few more rate cuts coming, it increases the likelihood for increased move activity.  while the peak move season is usually in the spring, housing starts and movement should be a tail wind in 2025

Bottom line:  I expect the 3rd Quarter to be a trough in both Revenue and EBITDA and for their to be growth in 2025 (should see qoq positive momentum in 4Q/1Q and YoY growth in 3Q).  More importantly, this should end the cycle of downward revisions and start the cycle of upward revisions which, in cable, has had strong correlation with multiple contraction/expansion

MBI, Balance Sheet and Valuation

1. Liquidity: As stated earlier, MBI is an overhang on CABO.  Currently, CABO has plenty of liquidity to pay for the 55% interest in MBI, which I estimate will cost them $720 million.  They currently have $200 million of cash, they should generate at least $400 million of cash by the end of 2025 and they have $750 million+ of availability under their revolver.
2. Debt: It is expected that once the MBI transaction is completed, leverage will creep slightly higher to the 4.2x area, but CABO should be able to deleverage quickly thereafter
3. Investments: CABO has $1.1 billion of investments on their balance sheet.  Assuming that the MBI transaction causes a write-down of $570 million, that would leave them with approximately $500 million of extra value.  I believe that the rest of the investment portfolio is marked conservatively, and I am comfortable with the $500 million.  Additionally, there is a chance that some of their investments will be monetized in the near term.  Metronet is currently being acquired by TMUS and there have been rumors that Ziply will be putting themselves up for sale.  While this may not result in huge proceeds, this certainly can be used to help pay for MBI and or reduce debt.
4. Valuation:  Assuming that CABO’s investments equal $500 million, at current prices CABO can be purchased at 5.7x 2025 EBITDA and 5.1x 2025 FCF.  For cable, especially an incumbent, this is a good value and in my opinion has limited downside risk.
5. If CABO is able to stabilize their subs, revenue and ebitda and actually start to show signs of growth in 2025, I think that the stock can double to over $700 in a year.
   1. As stated earlier, cable multiples move with analyst revisions and even without revising financials higher, a $700 price would be 8x 2025 E. EBITDA and 12.5x E. 2025 FCF.  These multiples are certainly fair for a cable company and are still below historical multiples.
   2. Additionally, if there were positive revisions, it would change the short thesis on could squeeze the 20% short interest
6. M&A: CABO is a takeout candidate.  It is clear that the convergence of wireless and wireline has started and that the wireless players are looking to purchase local broadband networks.  TMUS has now made a few fiber purchases, and VZ announced the purchase of FYBR.  CABO can certainly be an interesting partner for one of the wireless companies

Catalyst

Earnings reports from cable operators showing stability of subs, revenues and ebitda