Should We Follow Mario Gabelli Into This Stock?
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, billionaire Mario Gabelli reported that he owned around 19.1 million shares of Cablevision Systems (NYSE: CVC) at the end of May, much higher than what he had owned at the end of the first quarter this year. Since the beginning of the year, Cablevision has dropped 1.74%, lagging behind peers such as Comcast (NASDAQ: CMCSA) and DirecTV (NASDAQ: DTV). For the past six months, DirecTV has been the best performing stock with a 23.6% gain while Comcast’s share price has increased nearly 6.4%. Should we follow Mario Gabelli into Cablevision? Let’s find out.
Sluggish share price performance
Cablevision is one of the biggest cable operators in the U.S., serving around 3.2 million video customers, more than 3 million high-speed data customers, and more than 2.4 million voice customers in several states including Montana, Wyoming, New York, and Utah. The sluggish share price might be due to its sluggish operating performance.
In the first quarter 2013, it experienced a slight decline in revenue, from $1.54 billion in the first quarter 2012 to more than $1.52 billion in the first quarter this year. While it generated more than $57.2 million in net income in Q1 2012, Cablevision produced a loss of more than $16.1 million in the recent quarter. Its adjusted operating cash flow (AOCF) experienced a decrease of 23.1% due to higher programming costs, higher employee-related costs, and the cost related to Hurricane Sandy.
Looking forward, Cablevision stated that WiFi would still be one of the company’s strategic initiatives, with around 80,000 Optimum WiFi access points being used by more than one million customers. Even with several challenges, including rising programming costs and increasing competition, Cablevision estimates double-digit sequential AOCF in the second quarter, thanks to the rising advertising revenue and spending reduction. Mario Gabelli believes that Cablevision could generate around $6.3 billion in revenue with around $1.6 billion in EBITDA. Its EBITDA has been growing, which could allow Cablevision to reduce its debt level.
Cablevision is trading at around $14.70 per share with a total market cap of more than $3.9 billion. The market values Cablevision at 7.7 times EV/EBITDA. EV/EBITDA represents Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization. This valuation ratio takes into account the relationship between the firm’s market value, adjusted by its cash and debt level, compared to its cash flow position. Interestingly, Cablevision is the most expensively valued in comparison to Comcast and DirecTV.
Are Comcast and DirecTV better buys?
Comcast is trading at $39.70 per share with a total market cap of $104.6 billion. The market values Comcast a bit cheaply at 7.2 times its EV/EBITDA. Comcast made a good strategic move with its complete acquisition of NBCUniversal. According to Comcast, NBC has real upside even though it has not been performing well for many years. Comcast saw that it would be able to provide better programming, which could lead to higher ratings, leading to higher CPMs.
In the first quarter of 2013, Comcast experienced good growth in both its top and bottom lines. Revenue increased 2.9% to nearly $15.3 billion while EPS jumped 20% to $0.54. Free cash flow came in at $3.14 billion, 3.3% higher than the first quarter of 2012. Comcast has a good history of returning cash to shareholders. Its dividend increased from $0.27 per share in 2009 to $0.65 in 2012. Comcast expects to pay $0.78 per share in dividends (20% year-over-year growth) and spend around $2 billion to repurchase its shares for the full year 2013.
DirecTV has the cheapest valuation of the trio. At $62 per share, DirecTV is worth more than $34.6 billion on the market. The market values the company at 6.9 times EV/EBITDA. DirecTV’s two main markets are the U.S. and Latin America. It had around 20.11 million customers in the U.S. and more than 16.3 million customers in Latin America. In the first quarter of 2013, DirecTV experienced 8% growth in revenue to $7.58 billion, thanks to higher ARPU in the U.S. market and subscriber growth in Latin American market.
Its free cash flow decreased from $952 million in the first quarter last year to $710 million in the first quarter this year due to higher capital expenditure in the U.S. and the timing of receivables. What makes me interested in DirecTV is its significant share repurchases program. In the first quarter, DirecTV spent around $1.38 billion to buy back its shares.
DirecTV expects to generate EPS of $5 or more for 2013, excluding the impact of $166 million in Venezuelan devaluation charge and $60 million non-cash charge for Mariners transaction. Looking forward, DirecTV would keep growing in its Latin American business and drive its EPS higher with its frequent share repurchases.
My Foolish take
All three businesses seem to be good stocks for investors’ long-term portfolios. Among the three, I like DirecTV the best with its lowest valuation, potential growth in the Latin American market, and its consistent and aggressive share buybacks.
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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends DirecTV. 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!