What Does Billionaire Mario Gabelli See In Cablevision?

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The move

Billionaire Mario Gabelli disclosed a 19.1 million share position in Cablevision Systems (NYSE: CVC) on the May 29, up almost 8.7 million shares from the amount that the fund reported holding in its portfolio at the end of March this year.

What does it mean?

The 13-F indicates that Gabelli’s family of funds now holds a stake in Cablevision Systems that exceeds 5%. Despite Gabelli’s exuberance, the $4.1 billion cable operator has struggled to gain positive mention from Wall Street, as firms like Citi, Baird, and Wunderlich securities have given a Neutral or Hold rating to the company in the past three months.

These ratings come after Cablevision debuted full-year 2012 earnings results at the end of February, which outlined a disappointing loss of $0.30, despite analysts hoping for $0.40 higher into positive territory. An exodus of customers across all lines of business (video, high-speed data, and voice) in the fourth quarter of 2012 account for most of the loss, although some was attributed to Hurricane Sandy.

Cablevision saw 50,000 video, 5,000 high-speed data, and 10,000 voice customers leave in that quarter alone, amongst increasing competition from streaming service providers like Hulu and Netflix.

Would we have expected earnings to improve pre-Q1 announcement?

Not likely, as seasonal advertising revenue would surely decrease. In early May, Cablevision announced another disappointing quarter, this time undercutting estimates by $0.13 and falling into negative territory once again. Revenue missed slightly but still dropped compared to the same quarter last year. These numbers now contribute to a forward price-to-earnings multiple that jumped to 38 compared to its trailing counterpart of 26, displaying analysts’ downward revisions of future earnings for the remainder of 2013.

From a technical perspective, Cablevision has seen impressive growth stretching back twelve months, up over 30%. However, year-to-date performance since the start of 2013 has been a meager 3%, especially given the overall market’s bullish rise. For an investor like Gabelli, the lackluster appreciation could be a perfect opportunity to collect shares, and Cablevision’s 3.9% dividend yield could soften the blow of flat movement in the future.

Who are its key peers?

Time Warner (NYSE: TWX) is another networking giant that finds a home in Gabelli’s portfolio, with $150 million of GAMCO’s assets devoted to the media company. Time Warner relies heavily on its cable networks, as those operations account for about 70% of total cash flow. Time Warner has a much more contained PE of 10, adjusted down after an earnings beat at the beginning of May. Time Warner actually saw its network’s division revenue climb 3% in that quarter, while Cablevision lost another 5,000 video customers. As an income investment, Time Warner provides a respectable dividend yield of 1.9%, although still significantly under Cablevision’s yield.

Cablevision also finds competition from satellite cable operators, predominantly in the form of DirecTV (NASDAQ: DTV) and Dish (NASDAQ: DISH).

DirecTV stands out as GAMCO’s top portfolio position, receiving a $280 million investment from the fund, while his allotment for Dish is roughly half of that. DirecTV has not taken a backseat to streaming content stealing subscribers; it has indicated some interest in purchasing Hulu, although KKR and Silver Lake Management have recently put in their own bids. The company began May with an earnings beat, showing revenue that grew 8% compared to the same quarter last year.

Dish did not fair as well, disappointing analysts by over 11% compared to estimates, although it added 66,000 new broadband subscribers and 654,000 new pay-TV subscribers (an improvement year-over-year).

Final thoughts

Although sell-side analysts remain largely neutral on the firm, Gabelli’s significant increase in shares in May show his support when others are fleeing. For example, Buffett has subscribed to this same methodology in the past, and we’ll be watching Cablevision moving forward, in addition to Time Warner, DirecTV and Dish.

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This article is written by Eric Winter and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. 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!

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