Important Company Financial Data
Price: $14.51 Avg. Vol: 4.11M Net Profit Margin(ttm): 6.3% Market Cap: 3.84B P/E (ttm): 118.03 Dividend Yield: 4.14%
52W Range: 10.76 – 18.85 EPS (ttm): .12 Debt/Equity: -‐2.28
Thesis / Key Points
Ø Online Streaming Sites: Consumers are rapidly substituting out of cable for online streaming sites. Cable is much more expensive than subscriptions to these online streaming sites and the higher prices are partly due to the fact that cable also provides “bundle” packages which offer customers a myriad of channels that they are not even interested in. Unfortunately for entertainment distributors like CVC, they are forced into contracts with content creators that lump more popular channels with lower-‐rated networks, and they are left with no choice unless they want to risk losing even more customers who demand certain channels. Moreover, streaming sites like Netflix, Hulu, and now Amazon as well, provide customers with less variety but more specific, in-‐demand content for cheaper prices. Recently, there has been a 150% increase in amount of households that receive television programming strictly from the internet and I believe this trend should only continue going forward. A shrinking consumer base will only continue to hurt this stock’s value
Ø Increasing Programming Costs: Inflation in programming costs is becoming a harsh reality for cable service providers like CVC as margins are being tightly squeezed. Content providers are demanding more and more for their programming. Meanwhile subscriber growth is flat for generally all cable service providers, and CVC is no different. This means that companies like CVC will have to either sit back and watch, helplessly, as rising programming costs eat away at their margins or they will have to increase prices, which is what many companies including CVC have begun to due. This general price level increase within the industry is making it that much easier for online streaming sites to steal away countless fed-‐up customers from these cable giants.
Ø Better Alternatives: Even if the rising cost of programming were to fall and the growing popularity of streaming entertainment were to diminish, CVC is still facing strong competition from within the cable distribution industry. Companies like Comcast and Verizon are more diversified markets across the country and are experiencing growth for their other services like internet and telephony. Whereas CVC continues to lose customers due to their rising prices and continued household turbulence, due to super storm Sandy, in their major market(s), the New York tri-‐state area, where 90% of their customer base resides.
Ø Heavy Debt: The cable industry is facing incoming structural changes that will have to be made in order to compete with the growing popularity of online streaming sites as well as adapt to rising programming costs. Companies in this industry will soon have to modify their business models and strategies. Unfortunately, CVC is in heavy debt at the moment and this makes its business very inflexible for the time being. This will give CVC’s competition an edge over the company. As it stands, CVC is currently the 7th largest cable provider by subscription. Although subscriptions industry wide are dropping, if CVC is unable to
adapt to changing market conditions like their competitors this will definitely lead to a loss of market share.
Misperception
Cablevision is considered by some analysts to be somewhat undervalued as it they believe it to have suffered the hardest of all cable companies during super storm Sandy which explains its recent disappointing quarterly results and its shrinking customer base. It also considered by some to be sufficiently diversified, with its telephony and internet services, to maintain its value despite online streaming sites eating away heavily at their cable TV markets. However, even before super storm Sandy the customer base and earnings were shrinking at an alarming rate, Sandy only intensified the negative results. The shrinking video customer base is especially troubling news for CVC as this makes up its largest customer base as only 9.5% of its total customers do not own a package with video service included. Moreover, this lack of diversity will hurt the company as it has seen declines in all three customer bases meanwhile competitors like Comcast have witnessed video subscribers decline but increases in its voice and internet subscribers.
VAR
Ø
Vince Richter: Investor Relations at Cablevision:
-‐ “[Netflix and other online streaming sites] are certainly an alternative source of content, and they do attract
away potential customers. Though, this does help our high-‐speed data revenue.”
-‐ “Optimum West was reallocated to add financial flexibility as we are exploring opportunities going forward.”
-‐ “Rising programming costs are an industry issue and this forces us to pass on costs to our consumers. Although,
we are tying are best to manage these costs.
Mr. Richter confirmed that rising programming costs are a large industry-‐wide issue for cable companies. He
also confirmed that Optimum West was reallocated in order to add financial flexibility. However he did state
that there were no other reallocation plans at this time which is curious as flexibility will be a necessity to adapt
to the changing business environment CVC is in. Lastly, he admits that online streaming sites pose a threat to
CVC’s video customer base, but it does boost high-‐speed data usage. This is somewhat positive but it is
important to note that video revenue is 55% of the company’s revenue and other companies with larger
proportions of revenue stemming from high-‐speed data like Verizon and AT&T will reap more of the benefits
that come along with online streaming sites.
Ø
Interviews with Cablevision Customers:
-‐ Louis Licato: Queens Resident: “I remember missing almost a whole season of Yankee baseball when they
blacked out MSG, [and also] the Food channel, Fox, and ABC. [They also] lack professionalism and good
customer service.
-‐ Juan Molina: Manhattan Resident: “They make a lot of promises but don’t really, ever deliver. I also get really
slow internet speed. They don’t really seem to care for customers and I feel like when I deal with them they are
just out to get my money.”
Mr. Licato is a long-‐time Cablevision customer despite is unhappiness with the company, and Mr. Molina has recently moved
into the New York metropolitan area and began using Cablevision but he also did not have much good to say about the
company. I think it’s important to note that if customers are that unhappy with Cablevision’s service and product, it is only a
matter of time before they switch to cheaper and more efficient alternatives. Cablevision not only needs to adapt to a
changing business environment but make sure they do not lose even more of their already declining market share to
preferred alternatives, whether those alternatives be online-‐streaming sites for their video content demands or other cable
companies that offer the same services.
How It Plays Out
The cable industry is facing numerous structural changes due to the growing popularity of a much cheaper alternative, online streaming sites, as well as the increasing programming costs from content providers. In order to overcome these oncoming challenges cable companies like Comcast, Time Warner, Verizon, and Cablevision are going to have to restructure their current business models. However, CVC is in heavy debt and this will limit its flexibility and ability to adapt going forward. As a result CVC will be unable to maintain its market share and will slowly lose business to both more adaptive competitors and cheaper alternatives, which will in turn hurt the company’s bottom line as well as its value in general.
Risks / What Signs Would Indicate We Are Wrong?
Ø The Dolan’s, CVC’s owners, could potentially sell the company within the next 12-‐18 months and this can possibly lead to an increase in value for the stock.
Ø If CVC wins an anti-‐trust lawsuit it currently has against Viacom, this could potentially lead to cheaper programming prices across the entire industry as well as increased profit margins for CVC.
Ø Television entertainment is far from dead. However, the avenues to access it are rapidly changing. If CVC can sell off enough assets and lowers its debt (as it has begun doing with its sale of Optimum West) in order to restructure its business model and adapt to the cable industry’s modern business environment, this company may prove to be valuable.
Signposts / Follow-‐Up
Ø The Cablevision-‐Viacom anti-‐trust suit Ø Cablevision’s next earnings report Ø Sales of more of the Cablevision’s assets
Ø Potential sale of the company within the next 12-‐18 months.
Company Description
Cablevision Systems Corporation (CVC) is a telecommunications company that provides cable television, voice and high-‐speed internet services as well as certain local media, programming properties and movie theatres. It also owns 97.2% of Newsday LLC, a newspaper publishing business. The company generally operates in the New York
tri-‐state area.
Ideas for MII
- I would recommend maybe some training sessions or info sessions for less experienced investors who have only recently joined the club. I remember from info sessions that it isn’t a prerequisite to know much about financials, financial modeling and other more advance investment techniques. I think it would be a great opportunity for the younger and more inexperienced members to develop and blossom as investors. With knowledge comes confidence and with confidence would come a greater forum for questioning and discussion which I would believe MII would always strive to improve on.
- I think MII could also benefit from more social events similar to how we have had Wings Over Charlottesville several times this semester but also one at a time different from our meetings could also help members of MII meet and interact with one another. - I think a weekly review of important current events that can shape the markets going forward could also provide for a forum of
discussion within the club. Whenever there is some extra time during meetings I think a quick overview of these important events could be very beneficial to MII.
(Exhibit 1) Revenue Mix
CVC has a heavy reliance on a declining video customer market. The revenue growth in smaller sources of revenue has been offset by significant declines in video revenue, some of which stem from super storm Sandy.
(Exhibit 2) 1 Year Stock Chart
The stock has been stable over the last year. However, they have not yet been able to recover from the drop in stock price after the damages super storm Sandy had caused. Furthermore, other than their anti-trust suit with Viacom, they do not seem to be undertaking any action that could boost the stock’s value, at least in the short term.
Exhibit 3: Market Research
The graph shows research done by Centris (a market research firm) and reveals that most cable consumers generally watch movies, primetime dramas, and primetime sitcoms which can generally be accessed through streaming sites for smaller costs.
