MoffettNathanson principal and senior analyst Craig Moffett initiated coverage of Cable One with a “neutral” rating and a $380 price target, adding that while its broadband-centric strategy seems to be working for the moment, heavy video subscriber losses could discourage potential buyers.
Cable One made headlines in April 2014 when it dropped 15 Viacom networks, claiming the channels including MTV, VH1, Comedy Central, Nickelodeon and others were too pricey. As a result, Cable One has lost about 20% of its video subscriber base in the past 14 months, while cash flow has risen more than 11% in the same period. That is largely due to lower content costs – Cable One said in an earlier Securities and Exchange Commission filing that it expects programming costs to fall 64% between 2015 and 2019.
Moffett can sympathize with the notion that a broadband-only strategy could be more profitable – he mapped it out in a report almost a decade ago called The Dumb Pipe Paradox – but he said it has some critical flaws.
“Does the company truly believe that all costs are variable such that cutting video will bring endless margin expansion?” Moffett wrote. “Are Cable One’s new shareholders really better off for their having played hardball with Viacom?”
Cable One was spun off as a separate company from Graham Holdings on July 1 and its price has fluctuated from its opening of $450 per share to $380.50 each over the past few weeks. The stock was trading at $409.01 per share (down $3.64 each or 1%) in afternoon trading on July 28.
Some analysts had seen the spin-off as a way to place a hard value on the assets. And at least one potential suitor – European telecom giant Altice, which agreed to purchase Suddenlink Communications in May for $9.1 billion, has acknowledged that it would be interested in pursuing cable assets like Cox Communications and Cablevision Systems as it looks to beef up its U.S. cable presence. Although Cox has said it is not for sale, Cable One would likely be on Altice’s radar as well.
Moffett also warned that while less video customers has led to some short-term profitability, it could cause some potential acquirors to think twice about a purchase of Cable One, Moffett wrote.
“Any potential acquirer would still place value on a video business, or pay less for the fact that Cable One has less of one,” Moffett wrote.