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business newsCable, Telecom Stocks Offer Some Gold -- and Lots of Coal -- for Your Stocking
By
Steve Birenberg
Dec 21, 2011 12:15 pm
Tom Rutledge and AT&T provide cheers and jeers for the holidays.
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Rutledge is arguably the best operating manager in cable based on his success at Time Warner Cable (TWC) and Cablevision. His loss to Cablevision is a major blow, especially after two consecutive quarters of worse than expected financial and subscriber results and early results at the acquired Bresnan properties that are lagging expectations.
Perhaps Rutledge is getting off easy for his part in Cablevision’s recent results, but given the long history of volatile decision-making from the company’s controlling shareholders, the Dolan family, Wall Street is giving Rutledge a pass and placing Cablevision’s struggles squarely at the feet of the Dolans.
After initially plunging about 20%, Cablevision shares regained half their losses on the day Rutledge left. The shares are being supported by takeover speculation, although most analysts think nothing has changed regarding the Dolan family’s desire to sell the company. Estimates for 2012 results have come down further and represent the greatest risk to Cablevision shares.
If the company meets current estimates, the shares are cheap on the basis of EBITDA and free cash flow. It is hard to see the shares much below $10 to $12 based on current estimates. However, Cablevision remains highly leveraged, amplifying risk should 2012 results fall far short of street expectations. I own a small position in Cablevision in my hedge fund and plan to stick with it at least until January due to tax considerations. I do not expect a quick rebound, and near $13 I think the shares have more downside than upside in the next few months.
Cablevision’s holiday coal is a shiny new present for Charter shareholders. Charter was already on an improvement track as over several years the company had upgraded its infrastructure and straightened out its balance sheet, removing imminent financial risk. Charter trails industry averages for penetration of services like broadband, phone, and digital TV. Charter does serve lower demographic geographies, but investors are going to view a new top-notch operating manager like Rutledge as an opportunity to close the gap.
Rutledge enters after the capital spending to upgrade the network is largely complete. This sets up a good financial profile where Charter can outgrow its peers in revenues, operating cash flow, free cash flow, and subscribers. Even with a 5% pop in initial post-Rutledge trading, Charter shares have significant upside if the company hits current 2012 estimates. Risks remain, however. The company is heavily leveraged, and Rutledge may prefer acquisitions to share buyback, dividends, or debt reduction. I have bought a small position in Charter in my hedge fund despite the initial 5% pop.
A similar story of Christmas coal and Christmas gold is occurring in telecommunications with AT&T’s (T) earlier than expected withdrawal of its attempt to acquire T-Mobile (DTEGY.PK). Recent comments from management following regulatory actions made it clear the deal was extremely unlikely to be approved. However, investors thought AT&T would at least follow through into early 2012 when it was to appear before regulators again.
Winners and losers are less clear cut but upside would seem to exist for shareholders of tower companies, Sprint (S), Clearwire (CLWR), and Dish Network (DISH). The major wireless players face a tougher competitive environment assuming T-Mobile is re-energized to fight for subscribers on a price basis.
Tower companies benefit, as four operators is better than three. In addition, if Dish Network’s spectrum is built out sooner now that the company has more partners available, more business for tower companies is possible. Sprint and Clearwire now have a potential new partner in T-Mobile, although it is not clear that the government would approve a combination a merger between Sprint and T-Mobile. T-Mobile could help out Clearwire, which would be to the benefit of Sprint.
Dish could be sitting pretty as its spectrum has more interested parties, particularly AT&T. In addition, the government may be willing to allow unused spectrum to consolidate into current wireless service providers even as it disallows mergers of the companies. I am not doing any trading at the moment surrounding the AT&T and T-Mobile news.
I wish you all a very joyful holiday season. The gift I receive from your interest in my commentary provides great joy. Thanks.
Disclosure: CVC and CHTR are net long positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.
Positions in CVC, CHTR
Entermedia is a long/short equity hedge fund focused on media, communications, and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the Funds’ investment management company, and has personal monies invested in the Funds. CBS and Discovery Communications are widely held by Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a long only registered investment advisor.
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Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
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