The Rutledge Return


The Dolan Discount. The FiOS Factor. The uncertain outcomes and potential pitfalls associated with buying Cablevision Systems stock got swept away this week with another alliterative observation: The Rutledge Return.

That's as in Tom Rutledge, Cablevision's chief operating officer, the man who oversees the core cable operations. And return as in return on investment.

The Dolans — chairman Charles and CEO James — “have not always managed the company well,” Sanford Bernstein analyst Craig Moffett wrote in a March report. “But the Dolans have also done much that is positive; they hired the nation's best cable executive — Tom Rutledge — and left him alone to run the cable business.”

Verizon's FiOS TV and Internet service hangs over cable stocks like a black cloud, and no cable company is as exposed to FiOS as Cablevision. Maybe because Cablevision's Long Island and New York City-area markets are so succulent: Cablevision has always been a leader in generating revenue per subscriber.

Yet Cablevision continues to thrive even as FiOS has climbed above the million-subscriber mark. The second-quarter numbers were more evidence. Cablevision — which does better than other cable operators in the spring and summer because of the summer homes on Long Island and the New Jersey shore — added 7,000 basic subscribers when analysts had projected a basic-customer loss. As Moffett pointed out, Cablevision has added net subscribers during the two years facing down FiOS.

Cablevision's digital video, high-speed Internet and digital voice services have high penetration rates. But pushing all three in a bundle has led to continued strong gains of voice and data customers. The company added 81,000 voice customers in the second quarter, 20,000 more than Moffett had forecast. Much of it apparently is coming from a sensible targeting of small business customers, which Cablevision doesn't break out separately.

A new initiative that's going to cost about $315 million to build, Rutledge said, is a Wi-Fi add-on designed to do even more to “cement our relationship with the customer for the long haul,” Rutledge said on an analyst call. Still, Cablevision's capital spending as a percentage of cable revenue declined a bit.

Profit margins are up. Rutledge was asked what the trend lines were on customer churn, marketing expenses and operating margins. His simple response: “Marketing is flat, churn is down, margins are up. They're all related.”

Aiming at the heart of the matter, Moffett said on the call he had a follow-up for Rutledge: What does he eat for breakfast?

“I didn't have anything today,” Rutledge said.

There you have it: Skip breakfast, beat the Street.

Cablevision's price uptick also had a lot to do with Jim Dolan saying the company was focused on closing the “valuation gap,” which was interpreted as making fewer big acquisitions and possibly doing things like buying back shares or spinning off Rainbow, currently riding high on AMC's Mad Men.

Which basically means removing more uncertainty and negatives, and letting Rutledge and his operation continue to do what they do best.