Cable One’s Approach Clicks With Investors

Video-last approach is good for cash flow, but mixed on broadband
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Some Five Years into an announced strategy that video just doesn’t matter, Cable One is beginning to attract some attention from Wall Street with its broadband-first focus, a strategy that seems to play perfectly into the evolving landscape of over-the-top and streaming content providers but might not be right for every cable operator.

Cable One CEO Julia Laulis

Cable One CEO Julia Laulis

Cable One has been the best-performing stock in the sector for two of the past three years. In the fourth quarter, it reported 4.7% revenue growth and 8.8% cash-flow growth, ahead of some larger peers. The company has consistently focused on broadband growth — its 600,000 residential broadband customers in Q4 are nearly double its 310,000 residential video subscribers — and said that is the main reason for its success.

But success can be measured in a multitude of ways. Cable One shareholders are obviously pleased with the strategy: The stock price has more than doubled since the company went public in 2015, rising from $399.84 per share on June 11, 2015, to $945.98 on March 5, 2019. Revenue and cash-flow growth have been at the top range for publicly traded cable operators.

Penetration Below Industry Average

Despite the laser focus on broadband, though, Cable One’s high-speed internet growth is the the slowest of any publicly traded cable operator. Broadband penetration has been hovering around the low 30% range for the past four years (it was 31.7% in Q4) compared to an average penetration rate of 47.9% across cable.

That lower penetration isn’t because of Cable One’s size, either. Atlantic Broadband, with about 426,000 internet customers, has 49% broadband penetration, according to Leichtman Research Group president Bruce Leichtman.

“It’s just a different strategy,” Leichtman said of Cable One’s broadband focus. “And from a valuation standpoint, it’s working. Until the market slaps them on the wrist, why stop it?”

Cable One famously dropped Viacom’s two dozen cable channels in a carriage dispute in 2014, never to return. But it hasn’t given up on video entirely. A cursory look at the operator’s website shows a channel lineup that, with a few minor exceptions, mirrors most other offerings from peer operators, including a 20-channel Economy package for $40 per month and a more robust 100-channel Standard package for $84 per month.

Cable One even offers a modestly discounted triple play of internet at 100 Megabits per second, standard cable and voice for $109 per month for the first six months, rising to $154 after that. In contrast, Comcast has a similar triple play offering for $79.99 per month for two years. Aside from the price differential, Cable One doesn’t really push the bundle hard to customers, because executives feel it doesn’t work.

“When it comes to the cost of video, the bottom line is that there’s not much left on the bottom line,” Cable One CEO Julia Laulis said at the Raymond James Institutional Investors conference in Orlando, Florida, on March 5.

Even the words “video” and “cable” have a “sort of negative halo,” she continued, which should disappear after Cable One changes its name to Sparklight later this year.

Leichtman points out that de-emphasizing video has its downside.

“It clearly impacts their broadband subscriber numbers,” Leichtman said. “By not having video, clearly their broadband subscribers are below market.”

So far the stock market has shown its approval by issuing Cable One the highest trading multiple in the sector at about 12.7 times cash flow, according to MoffettNathanson principal and senior analyst Craig Moffett. The rest of the sector trades at between 9 and 10 times cash flow.

Value of a Customer

At the National Cable Television Cooperative Winter Education Conference in Atlanta in February, Moffett said that with an increasing number of programmers lining up direct-to-consumer distribution, the value the market places on a pay TV customer has plunged. He estimated a typical video customer is valued at a multiple of about 2 times cash flow, while a broadband subscriber is attached a value of between 12 and 13 times cash flow.

Leichtman doesn’t believe it is that simple. While Cable One is enjoying success at 32% broadband penetration, getting to the next level — 40% to 45% penetration — involves a different product mix.

“To get that incremental 15%, the bundle is involved there,” Leichtman said. “To grow it, to expand the subscriber base, [video] is part of the glue.”

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