Cable Operators

IAMC: New Tool For Investors

4/20/2009 11:10 AM Eastern

Wall Street has a new tool to analyze cable companies.

Miller Tabak media analyst David Joyce began using yet another metric last week, one that seems eerily appropriate in light of recent goodwill writedowns — intangible assets to market capitalization.

Simply put, IAMC is the value of goodwill and intangible assets a cable company has on its books divided by its market capitalization. According to Joyce, a company with an IAMC of less than 100% is less at risk for a big writedown, which could point to balance sheet quality and survivability issues.

The use of intangible assets to market-cap ratios in evaluating stocks is nothing new — it has been used with some success in the banking industry recently. And in a stock market that doesn't seem to be paying attention to fundamentals, it could be another means of determining risk.

While generally accepted accounting principles require that a company conduct impairment tests, which usually take place in the fourth quarter, they are somewhat “rear-view mirror in their approach, as the stock price is a major valuation factor on which the write-down relies,” Joyce wrote.

And write-downs were a big factor for some media giants last year — Time Warner Inc. took a $25 billion write-down in the fourth quarter of 2008, about $15 billion for franchise rights at its Time Warner Cable unit and the rest for its AOL assets. As a result, Time Warner Inc. swung to a $16 billion operating loss in 2008 compared to operating income of $8.9 billion in 2007.

Time Warner Inc.'s stock price was a big reason for that impairment. The company reported $38.9 billion in intangible assets not subject to amortization — predominantly franchise rights — in 2008. The $15 billion figure represented a 39% write-down.

According to Joyce's calculations, the top cable operators for IAMC are Cablevision Systems (48%), RCN (75%) and Knology (86%). The worst are Mediacom Communications (616%), Time Warner Cable (273%) and Comcast (185%).

On the programming side, Lionsgate Entertainment (38%) and The Walt Disney Co. (67%) were the top performers, with Viacom (104%), Discovery Communications (109%) and News Corp. (110%) on the cusp. Time Warner Inc. was the programmer with the highest IAMC — 164%.

In his research note, Joyce added that while a ratio of above 100% puts a company at risk, those that are much higher may be over-penalizing and could be creating “intriguing, although somewhat speculative, buying opportunities.”

While IAMC won't replace other valuation methods, such as EBITDA (earnings before interest, taxes, depreciation and amortization) multiples, it is another tool for investors. Shortly after Time Warner Inc. announced its big write-down, its stock (adjusted for a three-for-one reverse split) fell from $32.94 per share to $30.87, a 6.3% ($2.07) decline.

Hello IAMC
Intangible assets to market cap (IAMC) is a new valuation metric that may indicate potentially large goodwill write-downs on the horizon. An IAMC below 100% usually indicates a low risk for a big write-down.

Co. Goodwill and Intangibles Market Cap IAMC
SOURCE: Company reports and Miller Tabak research
Cablevision $2.3 B $4.8 B 48%
Disney $24.8 B $37.2 B 67%
RCN $128 M $171 M 75%
Knology $157 M $183 M 86%
Viacom $12.1 B $11.7 B 104%
Discovery $7.6 B $7 B 109%
News Corp. $23.3 B $21.2 B 110%
Time Warner Inc. $43.7 B $26.6 B 164%
Comcast $78.9 B $42.6 B 185%
Time Warner Cable $26.7 B $9.8 B 273%
Mediacom $2 B $327 M 616%
September