Al Fried Llc Analytics Report CVC 070909 Ak Marked
Rich Tullo Trading Desk Analyst firstname.lastname@example.org (212) 422 – 7282 July 14, 2009Cablevision Systems Corp.Ticker CVC Rating BUY Stock ChartPrice: $12.84* Price Target: $23.00MCAP.: 5,386mm Shares Out.: 247mmAvg. Vol.: 1.4mm Short Int.: 5.996 mm10 Day52 Week 52 Week $28.00* $9.34High: Low: 2006 2007 2008 2009E 2010EEV/EBITDA P/E 5.9x 11.1x Revenue 5,828,493 6,484,481 7,230,116 7,724,827 8,193,9422010E: 2010E: EPS $ (0.45) $ 0.74 $ (0.78) $ 0.94 $ 1.57Notes: In 2008 CVC completed the Purchase of Newsday and only includes Newsday results in its 2H:08 filings.Initiate Coverage of CVC with BUY Rating and $23 TargetKey Points:• We like CVC’s recurring revenue model and expect strong customer retention as home entertain- ment becomes a priority when consumers cut luxury spending in a stay-cation economy.• In our view, CVC’s “out of the box” business development strategy should create shareholder value in the long-run.• Cable Advertising is more sustainable and will recover faster than traditional Local TV and Newspa- per advertising , in our view, as local advertisers follow potential customers onto the new media.• We think CVC’s Madison Square Garden is a hidden asset. According to SEC filings, MSG’s book value is $743 million; we think MSG’s book value is understated by approximately $500 million.• As CVC refinances its debt; credit risk will diminish in our view. In the absence of bolt-on opportuni- ties, we expect management will return cash to shareholders or pay-down debt.• We derive our $23 price target by applying a 14x multiple to our $1.57 2010 EPS forecast, which is roughly in-line with the market multiple.• Our Price Target is also supported by our sum of the parts analysis which implies a $23 intrinsic value and with roughly 30% upside to our target, we initiate coverage of CVC with a BUY rating. See important notes, disclosures and disclaimers on page 10, 11 before making investment decisions.
Description: Cablevision Systems Corporation (NYSE: CVC) is a telecommunications, media and entertainment company .that provides Broadband Internet Access, Cable TV Service, Cable TV Content, News, Sports and Theatrical entertainmentsthrough its four subsidiaries; Telecommunications Services, Madison Square Garden , Rainbow Holdings and Newsday. CVCalso own a stake in Clear View Cinemas chain of 50 movie theaters.• Telecommunication Services (70% of sales): Roughly 4.7 million households subscribe to CVC video, data and telecom services and in 1Q:09 CVC generated about $136 in revenue per subscriber.• Madison Square Garden (13% of sales): CVC’s Madison Square Garden subsidiary owns the Madison Square sports arena, The New York Rangers NHL Hockey Team, The New York Knickerbockers NBA Basket Ball Team, The New York Liberty WNBA Women’s Basketball Team as well as the MSG Cable Sports Network and the FUSE TV cable music chan- nel. MSG also owns The Radio City Music Hall, The WAMU Theater, The Beacon Theater and The Chicago Theater.• Rainbow Holdings (14% of Sales): CVC’s Rainbow Holdings unit operates the WE, Sundance, IFC, AMC and Voom HD Cable TV Networks. Rainbow provides a mix of scripted and reality TV programming and produces the Emmy award winning series “Ad Men”. Rainbow generates revenue from cable TV carriage agreements and from advertising sales. In 1Q:09, Rainbow revenue expanded roughly 11% to $249 million (from $225 million in the 1Q:08) as sales in tradi- tional media declined 5% to 20%.• Newsday (2% of Sales): The Newsday Newspaper Group publishes Long Island New York’s Newsday newspaper which is the largest “US suburban local newspaper” according to the Newspaper Association of America or NAA. Newsday also operates several internet Websites and the AM New York “Free” advertising supported daily newspaper in New York City. Newsday also operates TV Newsday a newly launched local cable TV News channel. Exhibit I: Cablevision Systems Unit Sales Unit Sales (in thousands USD) 2007 %∆ 2008 %∆ 2009E %∆ 2010E %∆ 2011E %∆ 2012E Telecommunications Services 4,721,169 9.4% 5,165,367 6% 5,475,289 7% 5,858,559 7% 6,256,941 6% 6,651,129 Rainbow 843,548 16.2% 980,133 10% 1,078,146 12% 1,206,446 8% 1,302,961 8% 1,407,198 Madison Square Garden 1,002,182 4.1% 1,042,958 1% 1,053,388 6% 1,116,591 1% 1,128,873 1% 1,140,162 Newsday NA NA 180,597 70% 307,015 1% 310,085 1% 313,186 5% 328,845 Eliminations (82,418) 68.6% (138,939) 36% (189,011) -17% (157,738) -10% (141,427) 2% (143,567) Total 6,484,481 11.5% 7,230,116 6.8% 7,724,827 6.1% 8,193,942 6.4% 8,720,535 6.0% 9,243,767 Source: Albert Friend and Company LLC. Estimates and Company ReportsInvestment Thesis: CVC shares are down roughly 55% from the 52 week high on concerns over the U.S. economy andthe CVC’s balance sheet. We think CVC shares are attractive at the current price level as we expect Cable TV revenuegrowth to continue and we think management has taken steps to create shareholder value. We forecast local advertisingspending will continue to migrate to Cable TV and the Internet . We derive our $23 Price Target by applying a 14x marketmultiple to our $1.57 2010 EPS estimate. We also argue that MSG is a hidden asset. Our sum of the parts analysis sug-gests that MSG has a equity value of $1.2 billion or $4.05 per share. According to our sum-of-the parts model CVC is fairlyvalued at $23, therefore with 30% upside to our target we initiate coverage of CVC shares with a BUY rating. Exhibit II: Cablevision Systems Sum of Parts Valuation Sum of Parts (EV/EBITDA 2010E) in thousands USD except per share figures Telecomm Madison Expected Scenario Services Rainbow Square Garden Newsday Total EV/EBITDA Multiple 6x 9x 30x 4x 6.9x Debt Allocation 7,724,986 1,757,187 500,000 600,000 10,582,173 Equity 4,985,744 848,736 1,174,886 (376,739) 6,632,627 Intrinsic Value Estimate $17.18 $2.92 $4.05 ($1.30) $22.85 Source: Albert Friend and Company LLC. Estimates and Company Reports
Industry Overview: Cable TV, was once a practical solution to unreliable TV broadcast signals in rural areas of the U.S. .Today the Cable industry has evolved into $86 billion U.S. industry owing to advances in Digital, Satellite and InformationTechnology. There are roughly 7,500 cable systems operating in the U.S. at the end of 2008 which is down roughly 31%from 1998 owing to industry consolidation. Cable systems compete with Free Broadcast TV, Cables Systems, Satellite TVNetworks and now Broadband Networks offered by Telco’s in the markets they serve.According to the National Cable TV and Communications Association roughly 125 million homes are passed by Cable TVlines in the US and roughly 50% of the homes passed take at least basic cable service. Moreover, since the June U.S. tran-sition to digital broadcasting the most homes passed have access to Digital Cable and High Speed Internet Service. TheJune U.S. conversion to Digital TV broadcasts may be a catalyst for increased cable subscribers. According to SNL Kagan, aleading industry data provider, the transition is expected to increase multi-channel subscriptions without generating alarge-scale migration. SNL Kagan conservatively estimates that 10% of over-the-air households will opt for multi-channel, with cable receiving the majority of converts and satellite and Telco splitting the remainder.Bundling or the packaging of TV Channels is an issue for Cable Service Providers. Cable companies offer package plans atvaries monthly subscription rates. Some consumer advocacy groups have lobbied for unbundling of channels , cited thatconsumers could save money by buying TV channels on an A la Carte’ basis. Most investors assume unbundling would bebad for industry sales. According Ali Yurukoglu (an NYU economist, that uses econometric models to value Cable TV pack-ages) consumers could save as much as 6% if allowed to switch to A la Carte’ pricing. Thus we expect package rates to re-main the industry standard and continued investment in on-demand content for consumers that are willing to pay a pre-mium prices for unbundled programming.We argue that the A La Carte’ pricing model A) Does not capture the true of the bundled Cable TV plans as the sum of theparts is greater than the whole, in our view B) Does not value the opportunity costs of replacing bundled programming withCable or Internet channels C) Underestimates the price consumers would pay for TV channels on an A La Carte’ basis andD) Does not account for the loss of niche’ Local, Hispanic and Urban TV channels which are economically unviable, accord-ing to our analysis, if unbundled from the basic cable subscription.We expect advertising sales trends to remain strong. Cable advertising sales are roughly 30% of industry revenue or $26billion. In 2008 Cable TV advertising grew roughly 3% versus a decline of 3% for Spot TV according to TNS market Intelli-gence. In 2007, Cable TV advertising grew 6.5% versus a decline of 10% for Spot TV. The long-term trend is that local ad-vertisers (like consumers) are switching from traditional media such as Newspapers and Local TV to New Media such asCable TV and the Internet. We think that trend has accelerated as second tier Local TV Channels and Newspapers are fold-ing owing to the collapse of the real-estate and auto markets.Madison Square Garden: We think the current CVC share price does not reflect the current or potential value of theCompany’s Madison Square Garden Assets. As we noted earlier MSG, is more than the eponymous sports arena located inthe heart of Manhattan. According to Forbes Magazine the New York Rangers Hockey Team, valued at $411 million, is thesecond most valuable NHL franchise. Exhibit III TM Source Forbes Magazine
Madison Square Garden Cont...: The Knicks, despite the team’s lackluster record in the NBA, is the #1 basketball .franchise according to Forbes. Forbes values the NY Knicks at $613 million. While Forbes values The Knicks and the NHLRangers at a combined $1.024 billion we think Forbes does not capture the cumulative value of MSG’s assets. Exhibit IV Valuation Breakdown TMDespite concerns about the commercial real estate market, MSG’s Madison Square Garden, Radio City Music Hall, andBeacon Theater are Trophy Class A properties which under normal market conditions would be valued at significant premi-ums over commercial real-estate cap rates (defined as the ratio of net operating income to the average sale price of com-parable properties). Thus we think the Forbes valuation underestimates the intrinsic value of MSG’s franchises and relatedreal-estate assets.The Madison Square Garden Arena cost roughly $123 million to build in 1968 and MSG’s book value is roughly $750 mil-lion according to the Company’s SEC filings. We think the replacement value of the MSG arena alone is about $860 millionbased on a 5% annual construction inflation rate. Owing to its location in Mid-town Manhattan Madison Square Garden isalso one of the world’s busiest venues second only to M.E.N in Manchester England. In addition to hosting roughly 120Hockey and Men’s and Women’s Basketball Games (annually) MSG hosts 200 other events including music concerts, ro-deos, and dog shows. We derive our $1.7 billion enterprise valuation for MSG by taking the sum of MSG’s sports franchisesincluding broadcast rights ($600 million), the replacement value of the Madison Square Garden Arena ($860 million), thevalue of the combined theater assets ($220 million), the value of Fuse TV and concessions ($60 million) and the projecteddebt ($500) incurred for the 2011-2012 renovation. While the 30x EV/EBITDA multiple for MSG seems inflated it trans-lates to a 3.3% cap-rate (on trough net operating income) . The cap-rate we derive approximates what an investor wouldpay for Trophy Class Properties in Manhattan given today’s interest rates in a normalized real-estate market. However wealso argue that sports teams generate lumpy cash flows and there is upside to MSG’s EBITDA should the Knicks advance tothe NBA play-offs. We estimate a successful play-off run could ad roughly $10 million per play-off round to MSG’s EBITDA.Sum of the parts: We use CVC’s 6x EV/EBITDA peer group average to derive our $12.8 billion enterprise value estimatefor CVC telecom business. We also use a peer group 9x multiple to derive our $2.5 billion Rainbow Holdings enterprisevalue. While the 9x group multiple seems rich, assets such as the Weather Channel have been sold at lofty multiples owingto investor expectations that Cable Advertising trends will continue to be favorable. We value Newsday by applying a 4xEV/EBITDA multiple to derive our negative $500 million enterprise value. Our $25 million 2010 EBITDA which assumesonly a modest recovery from 2008 breakeven results. While we think Newsday may ultimately prove to be a good acquisi-tion its value in our view will be derived by cross-selling newspaper subscriptions, and leveraging the Newsday and AM NewYork brands on the Internet, 3G Mobile Networks and over CVC’s proprietary Cable System. Net of debt we think CVC’s eq-uity is worth $6.6 billion or $22.86 per share. We also think there is upside to our sum of the parts valuation as CVC’s man-agement has entertained a management lead buy-out at $36 per share in 2007. Moreover, we think CVC’s Telecommuni-cations business may be attractive to a strategic industry partner such as ATT (NYSE: T, NC) or Verizon (NYSE VZ, NC) whichare expanding there own broadband networks in the New York Tri-state Area and could advantage of programming syner-gies at the “cable head”.
Balance Sheet and Cash Flows: Like all. cable operators CVC has a leveraged balance sheet with roughly $11 billionin net debt at the end of 1Q:09. While some analysts have modeled CVC will reduce leverage we estimate only a moderatereduction in leverage. We model an increase in CVC cash balances based on management’s comments. We think its likelythat once CVC rolls its near term maturities to 2016 and beyond, the Company will use its excess cash to make bolt on ac-quisitions or pay a special dividend to shareholders. (We note in 2006 CVC paid a $10 per share special dividend).CVC hedges roughly 92% of its debt with plain vanilla swap instruments and thus we expect CVC to be protected againstvolatile swings in interest rates as CVC debt is locked in at roughly 6.9%. Moreover, while we carefully watch the credit mar-kets we think a slower recovery benefits CVC as interest rates will remain low. In a booming economy we anticipate thatCVC will be able to raise unregulated communications rates and grow its top-line faster than nominal GDP while many of itscosts are fixed. We also think MSG revenue could accelerate at rates faster than inflation as many of its sports contractsare locked in for several years.While non-cash charges and large depreciation expenses have historically resulted in EPS volatility CVC generates ampleFree-Cash-Flow. In 2008, despite the worst recession since the FDR era CVC generated $1.22 in FCF per share to yieldroughly 10%. In 2009 we expect a slight reduction FCF to $1.55 owing to decreases in accruals and working capital to yield8.8%. In 2010 as CVC top line improves we expect FCF to expand to $1.81 per share to yield 10.3%.Risks to Invest Thesis:• CVC may not be able to respond to rising interest rates or inflation which could result in results below our projections.• CVC results could suffer from above expected client defections resulting from a weak economy or competition.• CVC is a highly leveraged enterprise and the failure to raise capital could result in a distressed equity share price.• New faster adoption rates for technologies such as 3G wireless or IPTV could result in revenue declines.• CVC’s capital structure allocation and acquisition strategies have undermined managements reputation with investors and continued missteps could result in low multiples than our models suggest.• Changes in consumer preferences could undermine the sports attendance and TV audience.• Verizon has requested that the FCC force CVC to allow VZ to carry CVC’s MSG channel on its FIOS network. While the FCC has no clear regulatory authority over cable, the case could get referred to the FTC under a worst case scenario.Recent Results: In 1Q:09 CVC revenue expanded 10.6% to $1.9 billion (from $1.7 Billion in 1Q:08) owing to increasedTelecommunications service fees, the afore mentioned increased Ad sales at Rainbow holdings, and the $83 million contri-bution from the Newsday acquisition. As operating margins improved to 15.7% (from 14.3%) operating income expandedto $297 in 1Q:09 from $245 million in in 1Q:08. Increased top-line and expanding margins resulted in 1Q:09 EPS of $0.15per share a marked improvement of the $0.11 loss per share posted in 1Q;08.Earnings and Revenue Forecasts: Despite challenging economic conditions and a recessionary advertising marketwe forecast modest top-line growth of 7% for 1Q:09 and CVC to remain profitable. We expect operating margins to decline13.7% in 1Q:09 (from 17.5% in 1Q:08) owing to challenges faced by CVC’s Newsday unit and from fewer special events inthe quarter as compared to the year-ago-period. Under a worst case scenario, we expect CVC to post 1Q:09 EPS of $0.15as compared to $0.40 in 1Q:09 which is well below the Wall Street consensus forecast of $0.30. However as the shareprice is down over 50% from its 52 week high we think below consensus results 1Q:09 are already reflected in the currentshare price and expected by most institutional investors.As the economy improves we expect CVC media and telecom franchises to participate. We expect 2009 revenue to grow7% to $7.7 billion (from $7.2 billion in 2008). We expect a profit in 2H:09 against a 2H:08 loss per share. We forecast2009 EPS of $0.97. In 2010, we expect 7% top-line growth as ad rates expand and with revenue growth we predict operat-ing margins will expand to 16.5% in 2010. Owing to better revenue and operating margins we forecast EPS to expandnearly 62% to $1.57 which is ahead of the consensus estimate but realistic in our view given a recovering U.S. economy.
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIESINCOME STATEMENT(Dollars in thousands, except per share amounts) 2006 2007 1Q:08 2Q:08 3Q:08 4Q:08 2008A 1Q:09A 2Q:09E 3Q:09E 4Q:09E 2009E 2010ERevenues, net 5,828,493 6,484,481 1,720,692 1,712,421 1,744,981 2,052,022 7,230,116 1,902,613 1,832,290 1,814,780 2,175,143 7,724,827 8,193,942Operating expenses: Technical and operating 2,651,890 2,891,337 792,439 709,684 738,255 1,004,008 3,244,386 870,861 842,854 834,799 1,004,916 3,553,430 3,616,657 Selling, general and administrative 1,471,366 1,558,455 421,330 417,822 447,480 451,725 1,738,357 455,113 454,408 431,918 522,034 1,863,473 1,916,140 Depreciation and amortization (including impairments) 1,119,829 1,118,888 260,992 287,622 277,541 681,654 1,507,809 278,991 283,999 278,313 278,313 1,119,617 1,303,341Operating income 588,892 911,068 245,541 299,296 281,339 (136,495) 689,681 297,820 250,530 124,068 204,069 568,668 1,355,805Other income (expense): Interest expense (891,674) 940,852 (211,653) (156,321) (196,554) (202,180) (796,930) (195,155) (198,858) (200,973) (200,973) (795,959) (851,059) Interest income 6,698 40,154 4,649 4,426 2,807 2,729 14,056 2,729 2683 2683 2683 10,778 10732Income (loss) from continuing operations before income taxes (282,493) 102,845 (43,591) 216,657 66,355 (515,753) (309,318) 39,052 59,374 100,960 201,089 421,081 635,478 Income tax (expense) benefit 140,462 (79,181) 15,363 (100,392) (39,286) 194,345 82,688 (19,048) (16,625) (26,250) (58,316) (147,378) 184,289Income (loss) from continuing operations (142,031) 23,664 (28,228) 116,265 27,069 (321,408) (226,630) 20,004 42,750 74,711 142,773 273,703 451,189Loss from discontinued operations, net of taxes 16,428.00 195,235 (473.0) (503) 32 (2) (946) (18)Net income (loss) (125,603) 218,899 (28,701) 115,762 27,101 (321,410) (227,576) 19,986 42,750 74,711 142,773 273,703 456,817 Noncontrolling interests & change in accounting principal (862.00) (443) (2,905) 199Net income (loss) attributable to Cablevision Systems Corporation shareholders -126,465 218,456 (31,606) 115,762 27,101 (321,410) (227,576) 20,185 42,750 74,711 142,773 273,703 456,817Basic net income (loss) per share:Income (loss) from continuing operations attributable to Cablevision Systems Corporation shareholders (0.50) 0.08 (0.11) 0.40 0.09 (1.11) (0.78) 0.07 0.15 0.26 0.49 0.97 1.57Loss from discontinued operations attributable to Cablevision Systems Corporation shareholders 0.06 0.68 (0.00) (0.00) (0.00) (0.00) - -Net income (loss) attributable to Cablevision Systems Corporation shareholders (0.45) 0.76 (0.11) 0.40 0.09 (1.11) (0.78) 0.07 0.15 0.26 0.49 0.97 1.57Basic weighted average common shares (in thousands) 283,627 288,271 289,950 289,950 289,950 290,365 290,286 290,286 290,286 290,286 290,286 290,286 290,288Diluted net income (loss) per share:Income (loss) from continuing operations attributable to Cablevision Systems Corporation shareholders (0.50) 0.08 (0.11) 0.40 0.09 (1.11) (0.78) 0.07 0.15 0.26 0.49 0.94 1.57Loss from discontinued operations attributable to Cablevision Systems Corporation shareholders 0.06 0.66 (0) (0) (0) (0) - -Net income (loss) attributable to Cablevision Systems Corporation shareholders (0.45) 0.74 (0.11) 0.40 0.09 (1.11) (0.78) 0.07 0.15 0.26 0.49 0.94 1.57Diluted weighted average common shares (in thousands) 283,627 294,604 289,950 289,950 289,950 290,365 290,286 290,286 290,286 290,286 290,286 290,286 290,288Other Metrics and Per Share DataNet Income TTM (125,603) 218,899 NA NA NA NA (227,576) (193,689) (231,573) (183,765) 273,702.69 273,703 456,817Operating Income TTM 588,892 911,068 NA NA NA NA 689,681 693,194 927,784 535,923 568,668 568,668 1,303,341EBITDA 1,708,721 2,029,956 506,533 586,918 558,880 545,159 2,267,768 576,811 534,529 402,381 482,382 1,996,103 2,659,146EBITDA TTM 1,708,721 2,029,956 2,267,768 2,267,768 2,267,768 2,267,768 2,267,768 2,267,768 2,215,379 2,058,880 1,996,103 1,996,103 2,659,146Enterprise Value 17,762,604 16,886,645 17,282,555 15,000,320 15,566,918 17,068,081 17,068,081 16,280,926 15,872,473 15,872,473 15,872,473 16,172,473 15,726,277EV/EBITDA 10.4 8.3 7.6 6.6 6.9 7.5 7.5 7.2 7.2 7.7 8.0 8.1 5.9Margins % of SalesGross Margin % 54.5% 55.4% 53.9% 58.6% 57.7% 51.1% 55.1% 54.2% 54.0% 54.0% 53.8% 54.0% 55.9%Operating Margin % 10.1% 14.0% 14.3% 17.5% 16.1% -6.7% 9.5% 15.7% 13.7% 6.8% 9.4% 7.4% 16.5%EBITDA Margin % 29.3% 31.3% 29.4% 34.3% 32.0% 26.6% 31.4% 30.3% 29.2% 22.2% 22.2% 25.8% 32.5%Net Income Margin % -2.4% 0.4% -1.6% 6.8% 1.6% -15.7% -3.1% 1.1% 2.3% 4.1% 6.6% 3.5% 5.5%Annual change %Revenue 0.00% 11.25% 0.00% 0.00% 0.00% 0.00% 11.50% 10.57% 7.00% 4.00% 6.00% 7.00% 7.00%Gross Margin 0.00% 9.03% 0.00% 0.00% 0.00% 0.00% 12.21% 9.90% -1.33% -2.66% 11.66% 4.66% 9.73%Operating Income 0.00% 54.71% 0.00% 0.00% 0.00% 0.00% -24.30% 21.29% -10.29% -55.90% NM -17.55% 138.42%Net Income NM NM NM NM NM NM NM NM NM NM NM NM 64.85%Source:Albert Fried andCompany LLC and Company Reports