Making Money From John Malone's Lunch

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When a lion takes down a gazelle, other animals also get a meal.

What's true in nature is also true in business. Small investors are always looking to profit from the maneuvers of large players.

In the area of broadband, the big player today is John Malone. The 72-year old Colorado entrepreneur has two vehicles for investors. Liberty Media (NASDAQ: LMCA) controls American assets, and has a market cap of $15.36 billion. Liberty Global (NASDAQ: LBTYB) mainly holds European assets and has a market cap of $18.95 billion.

That's over $34 billion in market cap, plus whatever Malone can squeeze out of bankers, in order to shop for cable systems around the world. Liberty Global has been most active this year, picking up Virgin Media for $23.3 billion and taking a stake in a Dutch system

But now the U.S. arm is getting active, taking a $2.6 billion stake in Charter Communications (NASDAQ: CHTR), along with board seats, raising speculation of a “mega-deal” that would consolidate Charter, Cablevision, and possibly Time Warner Cable (NYSE: TWC) in a Liberty-controlled entity. 

What Malone sees

Malone sees rising costs for rolling trucks as killing new broadband investments, at the same time the value of that pipe for Internet traffic becomes clear. He believes he can essentially become a global Internet monopolist, raising prices for consumer access to the resource, and at the same time demanding rent from players like Netflix for reaching “his” customers.

Regardless of what you think of that strategy, the fact is that Malone has the money to play. That is one reason why Telsey Advisory Group now has a $135 price target on Time Warner, 20% higher than it's presently worth. 

Time Warner, meanwhile, sees Malone buying it time. The industry is bedeviled by the fact that consumers are increasingly killing their cable bills and going with Internet service only, then looking to buy content directly from Netflix or other players, such as Amazon.Com. The only thing holding them back is the attractiveness of live sports, a model Malone sees as “unsustainable.” 

How you can play

In the wild you make money off the gazelle by being a hyena or vulture and circling as the lion stalks her prey. In the markets you put your money on the prey and then profit when the lion pounces. And the weaker the prey, the more likely you are to get a meal.

That's why investors have been piling into Charter Communications all year, raising its value 62% so far. The company's finances are nothing to write home about. Revenue has stagnated at $1.9 billion per quarter, there hasn't been a bottom line in years, and even operating income has been falling. Debt to assets sits north of 75%, and even cash flow is cratering.

The only reason to be in Charter is to get out of Charter, in other words. Malone's investment started its bull run, and the hope of a cash-out – either from Liberty or perhaps Time Warner – is keeping it going.

Time Warner Cable, meanwhile, has become a good value play. Its $0.65 per share dividend yields 2.34%. It usually makes money, its debt-to-asset ratio is two-thirds' that of Charter, and it has been throwing out an average of $3 billion in cash each quarter, making that dividend very easy to sustain.

The Foolish Bottom Line

All this means you have two easy ways to play Malone's ambitions, either one of which would likely yield you a good hunk of stock and cash within a fairly short time period. Charter is the weaker gazelle, but you can put money into Time Warner Cable and wait out the hunt.

Dana Blankenhorn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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