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March 01, 2006

Strong Quarter At Cablevision Could Boost Cable Stocks

Cablevision (CVC) shares are up sharply after the company reported better than expected 4Q05 results and announced 2006 guidance for its cable division that is above current analyst estimates. As the conference call begins, CVC shares are up 5% and dragging Comcast (CMCSA/K), up over 1% along for the ride. Wall Street may hate cable stocks but with CVC in the books, the big three of CMCSA, Time Warner (TWX), and CVC have all reported double digit gains in EBITDA on improved basic subscriber growth, stable to higher ARPUs, and stronger than expected growth in new services including high speed data, telephony, and digital TV. With CMCSA and CVC trading under 7 times EBITDA, producing big free cash flow, and projecting another year of double digit growth, I continue to think the street is wrong and that cable stocks will offer decent returns in 2006....

CVC reported a strong quarter. Cable revenue grew 16.1% with EBITDA growing 15.8%. Both of these figures slightly exceeded analyst estimates. Subscriber metrics were particularly strong. Basic subs rose by 17,000 ahead of estimates that ranged from 3,000 to 10,000. Digital TV, high speed data, and telephony subs each grew more than expected. Digital subs were up 119,000 against expectations for a mid-90,000 gain. High speed data subs grew 94,000 against expectations of 75,000. Telephony subs were up by 130,000, versus analyst estimates fro gains of 100,000 to 120,000. ARPU was strong at $100.46, the first time it has ever exceeded $100. Churn remained under control with management attributing the especially low churn among the growing base of triple play subscribers. This is having the impact of helping the closely watched basic subscriber growth.

Capital spending was slightly higher than expected at $189 million. Most analysts were closer to $175 million. Most of the excess was from customer premise equipment that came from the better than expected sub growth.

There is no sign that CVC growth is about to abruptly slow. Penetration of digital TV, high speed data, and telephony grew sequentially by 350 basis points, 200 basis points, and 290 basis points, respectively, from already industry leading levels. Competition from RBOCs, via low cost DSL and Verizon's fiber overbuild, so far seems to have no impact.

Guidance for 2006 implies another year of strong growth. Basic subs are projected up 2-2.5% with total revenue generating units up 1 million to 1.25 million. Analyst estimates assumed growth of less than 1% for basic subs and RGU gains of no more than 1 million. Revenue and EBITDA are both projected to rise in the mid-teens on flat capital spending. At one point earlier this year, analysts expected slightly lower capital spending in 2006 for CVC and the entire industry. Due to faster than expected subscriber gains, 2006 capital spending is now projected flat throughout the industry. This remains the key point of concern for investors. CVC management reiterated that there is no need to rebuild plant and capital spending is a function of new product growth.

The Rainbow national networks including AMC, Independent Film Channel, and Women's Entertainment enjoyed low single digit revenue growth in 4Q05. Growth in revenue and EBITDA is 2006 is projected in the high single digits. In response to a question management stated it was not looking to sell the networks. The street would like to see a sale.

The balance sheet is leveraged relative to CMCSA and TWX at 4.9 times debt to EBITDA. With an agreement in place for a new credit line, a special dividend is back on the table. Analysts estimate a $10 dividend, as previously planned, would raise leverage to 6 times. The sale of the Rainbow networks would likely be back on the table if the dividend comes to pass.

I think CVC shares are cheap. I also think CMCSA shares are cheap. CVC is the more aggressive play as growth is faster, leverage is higher, and management-shareholder conflicts exist. CVC also has takeover potential. I like cable stocks and think the street will eventually lift valuations in recognition of double digit EBTIDA growth, flat capital spending, and growing free cash flow. CVC's earnings report wraps up reporting season for the major market operators and supports the bull case.

Posted by Steve Birenberg at March 1, 2006 02:13 PM in Comcast/Cable TV