Cable television may no longer be the float-generating cash cow it once was. Cablevision Systems (NYSE: CVC) saw its revenues shrink in the last two quarters of 2015.
Cablevision reported a TTM revenue of $6.52 billion in June 2015 that fell to $6.51 billion in September and December. This ran counter to Comcast (NASDAQ: CMCSA), which saw its revenues grow from $71.12 billion in June 2015 to $74.51 billion in December, an increase of $3.39 billion, which seems to indicate that rumors of cable’s demise are greatly exaggerated.
Another cable company, Time Warner Cable (NYSE: TWC), reported a slight revenue growth. Its TTM revenue grew from $23.31 billion in June 2015 to $23.7 billion in December. That makes for an increase of $39 million, which indicates that the market for cable, or some of cable company’s services, such as high speed internet, is growing.
Is Cablevision Making Money?
Now for the big question: Are cable TV companies making money? After all, their subscription business model should be generating a lot of float. “Float” is Uncle Warren’s term for continuous cash flow that a company can always access. A classic example is subscriptions.
The answer in Cablevision’s case appears to be yes. Cablevision reported a net income of $175.45 million, a debt to income ratio of -1.952, a diluted earnings per share of .6253, and a return on equity of -3.52% for the fourth quarter. Despite those numbers, it also reported $1.258 billion in cash from operations and $1.459 billion in cash and short-term investments.
Even though its cash flow is limited, Cablevision has quite a bit of float, which justifies the Cable TV business model. Nor was Cablevision alone in the fourth quarter, Comcast had $2.401 billion in cash and short-term investments and made $18.78 billion cash from operations, which indicates a vast amount of float.
Time Warner Cable reported $6.539 billion in cash from operations and $1.17 billion in cash and short-term investments. So yes, cable companies are generating a lot of float, but are they a classic Warren Buffett-style value investment?
Is Cable Television a Value Investment?
Cablevision might be because it is rather cheap right now. Its shares were trading at $32.89 on March 11. The company also appeared to be undervalued, with a market capitalization of $9.099 billion and an enterprise value of $17.23 billion. It also paid a dividend of 1.82%, but investors received a -3.52% return on equity.
Comcast looked even better. It was trading at $59.16 a share, but delivering a dividend yield of 1.69% and a return on equity of 15.92%. The cable giant was also undervalued, with a market capitalization of $145.61 billion and an enterprise value of $197.54 billion.
Time Warner Cable was grossly overvalued at $195.91 a share, but it provided investors with a 1.91% dividend yield and a 21.74% return on equity. I would stay away from that stock because it sounds as if those numbers are based on the ridiculous share price.
So Yes, Cable TV is a Value Investment
So yes, Cable TV is a value investment; it is a widely disliked industry that makes a lot of money and has some excellent growth potential because of the popularity of high-speed internet.
Value investors should take a closer look at cable because it provides the delivery system for digital content. This includes YouTube, Amazon, Netflix, and World Wrestling Entertainment (NYSE: WWE), which sold 1.31 million subscriptions in its WWE Network during the third quarter of 2015. WWE also attracted 456.4 million views on its YouTube channel during August 2015 alone.
The vast potential of digital content has attracted the attention of Alphabet (NASDAQ: GOOG). The company, formerly known as Google, has set up a subsidiary called Fiber to install an internet service with a one gigabyte speed in select American cities.
It is not clear if Alphabet (NASDAQ: GOOGL) is serious about entering the cable and telecom business or simply pressuring existing players into installing higher speed internet. AT&T (NYSE: T) is installing its own high-speed service, U-Serve, at a faster rate than Fiber.
So Where is Google Fiber Anyway?
Fiber is currently available in just four cities, Austin, Provo, Atlanta, and Kansas City, Missouri. Alphabet has plans to roll it out in eight more, Salt Lake City, Nashville, San Francisco, San Antonio, Charlotte, Huntsville, Alabama, and Raleigh-Durham. A map on Fiber’s website lists Los Angeles, Orange County, Phoenix, Oklahoma City, Chicago, Louisville, Jacksonville, and Tampa as potential Fiber cities.
Fiber applied for a business registration in Colorado in 2015, The Denver Post reported. Yet there is no indication that service would roll out in Colorado, which has notoriously bad internet service.
This indicates that the near monopoly cable companies have in some markets is fairly safe for the near future. Alphabet is moving slowly, possibly to avoid entanglements with local regulators and stay out of state, city, and regional politics.
Therefore, cable companies will continue to generate float and remain a decent value investment for some time to come. If you are looking for a fairly safe and cheap way to cash in on the digital entertainment revolution, cable could be it. Cablevision and Comcast, in particular, look undervalued.