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May 03, 2007

Cablevision 1Q07 Earnings: Going Private But Meaningful

After listening to the Cablevision (CVC) conference call, my initial impression that the cable bears came away with more ammunition should have been a more balanced view. That said, the sentiment battle facing cable stocks is likely to remain difficult while the stocks do not reflect close to fair value in my opinion.

CVC reported revenue and EBITDA growth of 15.5% and 12.6% in its cable operations. Both figures were below estimates and EBITDA margins fell slightly. Management noted that the company did not take an across the board price increase this year and does not expect to later in the year. With programming expenses stepping up due to annual inflators and new costs for Fox Sports NY, margins were squeezed.

Penetration rates for CVC are very high. Over 80% of basic cable subscribers now take digital cable. High speed data is taken by 46% of homes passed and 67% of the basic cable subscribers. Even telephony, a newer product, is taken in 29% of homes passed and by 62% of current high speed data subscribers. Slowing growth is inevitable as penetration rates approach these levels, especially as competing products from Verizon (VZ) are deployed more widely.

Management did admit, as it had done on the 4Q06 call, that VZ's FiOS rollout was impacting CVC....

Specifically, churn is up in basic cable and high speed data subscribers. CVC is no facing FiOS in about 25% of its footprint. While the triple play is causing changes in how cable does annual pricing reviews, I suspect it is a good assumption that CVC chose not to increase prices as a competitive response to VZ. The bears will claim this point.

Bulls will note that despite industry leading penetration rates for its services, CVC is still growing at a very healthy rate. In other words, despite the competition from VZ, three years into the triple play rollout, CVC is still growing EBITDA at solid double digit rates. Management stood by its full year guidance for mid-teens growth, implying a pickup in future quarters.

Bulls will also note that as CVC reaches relatively mature levels of penetration for its products it s capital intensity is falling. Capital spending trends will benefit as new subscriber growth slows because there will be less need for new set top boxes and cable modems. Thus, as growth slows returns begin to rise.

The key question becomes how much does growth slow and will pricing pressures on established customers develop such that the returns on the highly profitable and moderately growing base begin to fall. Comcast and Time Warner aren’t likely to face this problem for a few more years because their rollout of the triple play lagged CVC. Comcast reiterated its growth profile at its analyst meeting on Tuesday by stating that it expects that 2008 and 2009 growth in revenue, EBITDA, and subscribers will at least match current 2007 guidance.

I side with the bulls and feel that cable stocks are significantly undervalued relative to likely growth rates over the 2007-2009 time frame. However, I think it will be very difficult to swing sentiment towards cable back to the bull camp over the next few months. I have no trouble maintaining long positions or getting longer in Comcast or Time Warner Cable (TWC), it just might require some patience to get the payoff.

Posted by Steve Birenberg at May 3, 2007 09:51 AM in Comcast/Cable TV