1 Cable Stock Actually Worth Buying

A wealth manager in the United Kingdom named Rothschild & Co oversees $5.6 billion and lists Berkshire Hathaway as its largest holding, representing 12.9%. But one of its most undervalued positions is much less well-known, and perhaps offers significantly more upside. That stock is Cable One (NYSE:CABO).

Cable One provides video, data and voice services in the US, and has separated itself in recent years from rivals in the telecommunications industry thanks to its focus on non-urban markets. Unlike its bigger competitors who target large markets, Cable One’s focus means it is often the exclusive service provider in these areas.

The company doesn’t simply provide a service but often invests in the regions it enters, which in turn leads to a closer-knit relationship with the communities it services and higher customer loyalty. With its high quality internet and cable services, Cable One facilitates the operations of more local businesses and remote work and hence economic growth.

And it’s not as if its offerings are lower grade versus its big city peers. Cable One must and does upgrade its network infrastructure to provide faster internet speeds, thereby meeting the growing demand for reliable internet in non-urban areas. 

The company’s focus on high-speed internet, especially in underserved rural areas, addresses a significant market gap where these communities have limited choices for high-speed internet. The consequence of bridging the digital divide is to build a strong brand and good customer retention. 

Speaking of which, Cable One has lower churn rates relative to the average telecoms player, a strong indicator of customers’ loyalty and ultimately it’s more cost-effective to serve existing customers than to find new ones. So, not only are costs kept lower and profits higher, but clearly the company’s products are well-received. 

It also means management has greater optionality to invest in longer term projects because the stability of revenues is in tact and can be counted on. Some of these projects come in the form investments and strategic acquisitions, such as of Hargray Communications that allowed CABO to leverage the acquiree’s existing infrastructure, customer relationships, and local market knowledge to save on costs.

And when it comes to the financials, it’s clear why Rothschild & Co was willing to dip a toe in the water.

Cabo Financials Look Really Good

For five years straight, each quarter without interruption has produced positive earnings before interest and taxes. Even with revenues slowing over the past year, and coming in at $420 million last quarter, the profit story has remained in tact. So too have gross margins stayed elevated at above 70% and even climbed in recent quarters to as high as 73.9% last quarter.

The solid bottom line figures quarter after quarter have also translated to impressive cash flows. Producing $102.3 million in levered FCF last quarter is a testament to its effective business model and operational efficiency. They are also key to financing growth initiatives and minimizing the need for costly debt.

With that said, debt levels are somewhat concerning already. The balance sheet has $3.8 billion in long-term debt against $489 million in cash. It’s more than enough to pay the $11.80 per share annualized dividend amount that corresponds to a 2.12% yield. 

So, what about the stock, is it a good deal or worth skipping?

Is Cable One Stock Undervalued?

According to 6 analysts, Cable One stock is very undervalued by 30.4% to fair value of $705.17 per share.

Interestingly, those cash flows we discussed have a material effect on a DCF forecast analysis and place fair value closer to $762 per share, suggesting even higher upside of 37.2%.

Counterbalancing the optimism is the firm’s price-to-earnings ratio of 41.5x, a lofty figure no matter how you scrutinize it.

Still, Cable One does have a high shareholder yield of 11.0% and a strong history of earnings that should comfort conservative-minded investors.

Other Key Factors To Note

One major trend over the past decade has been that of cord-cutting where subscriptions to apps have been on the rise at the expense of legacy cable companies. For shareholders, a comforting piece of news is that Cable One is quite insulated from that shift in consumer preferences because of its limited reliance on cable TV revenues.

As a result, it shields the company from declining revenues that many cable providers face as subscribers flee in droves to services like Netflix.

The company’s foresight in transitioning towards broadband services demonstrates its adaptability and management’s understanding of market dynamics that are essential in the telecom industry.

It’s also proven highly successful at bundling services, especially through partnerships with streaming services and so resonating with consumers who gravitate more and more towards the Spotifys and Hulus of the world.

As customers perceive more value they are increasingly less likely to veer away from Cable One to other providers. Much like the friction to an iPhone user leaving is so high because all their apps are under one phone umbrella.

The combination of bundling of traditional broadband services with newer streaming options also allows Cable One to tap into new revenue streams.

Is Cable One Stock a Buy?

Cable One appears cheap on a valuation basis, both according to analysts and cash flows. It does however trade at a premium to earnings according to its PE ratio. With that said, the company’s earnings are highly predictable, and have withstood the turbulence of the broader economy over the past five years to remain well in the black. 

That stability is precisely what attracts investors to stick with the firm for the long-term alongside a modest dividend yield that appears sustainable for the foreseeable future in spite of the relatively high debt level on the balance sheet.

All in all, Cable One appears to be a solid company with good upside potential, albeit one that is unlikely to blow the roof off of any portfolio anytime soon.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.