The Best Stocks For 2011: Cablevision
Value investors will tell you that some of the best investments are found in industries so toxic
, you'd need a hazmat suit just to take a closer look at their balance sheets. You know the industries I'm talking about: Airlines. Consumer finance. Homebuilders. These stock market ghettos couldn't possibly be home to big winners, right? Wrong. So with history on my side, I give you Cablevision (NYSE: CVC) as my choice for the best stock to own for the year ahead.
Why you should tune out? You've probably heard of Cablevision if you live in or are from New York. Controlled by the founding Dolan family, the company is a media conglomerate not unlike peers Time Warner(NYSE: TWX) and Comcast (Nasdaq: CMCSA). "On top of longer term worries all cables have regarding 'over the top' competition luring their subscribers off their pricey bundles, [Cablevision] has near term pain arising from its failure to negotiate a deal with News Corp. for carriage of Fox channels," wrote Foolish investorThatBoo in October.
Why you should tune in:- Bears are being too harsh. First, every cable and satellite company suffers channel negotiations. Second, Cablevision Chairman Chuck Dolan has spent more than 40 years building, acquiring, and selling media companies. He wouldn't let a content squabble kill his golden goose. (Fox and Cablevision settled their differences after a 15-day blackout in which Fox channels weren't available to Cablevision subscribers.) Remember, Dolan helped bring cable TV to Manhattan in the first place. He also introduced the idea of premium programming with HBO. And from 1973 till today, he's been the guiding force behind Cablevision. Forbes estimates Dolan's wealth at $2.6 billion.
Expect that total to grow. Along with other shareholders, Dolan profited from Cablevision's distribution of its interest in Madison Square Garden (NYSE: MSG) to owners in February. His holdings now account for just more than 12% of MSG, whose interests include the New York Knicks basketball team and New York Rangers hockey team. (Booooooooo! Sorry, Islanders fan here.) There's more than personal enrichment at work in the MSG deal. Cablevision is a more profitable company today than it was when Madison Square Garden's sports and entertainment properties were under its purview. Why? Last year, Cablevision's pre-tax profit margin on telecommunications services was five-and-a-half times greater than the comparable margin for its MSG unit.
Increased profitability makes Cablevision more attractive, especially when coupled with strong cash flows. Each year, the company generates from $700 million to $1 billion in free cash flow. Consistently. This means that Cablevision has no trouble servicing its capital requirements, interest payments, and a dividend that yields 1.5%. Cablevision also has the capital to fund new projects that seem worthy. The Walking Dead, a critically acclaimed AMC television series, debuted on Halloween to huge ratings. Based on a comic book series created by Robert Kirkman, the zombie-enriched drama finished its first season on AMC earlier this month and has already been picked up for another.
That's good news for Cablevision. History says hits produce profits. With Mad Men andBreaking Bad, among others, Rainbow saw operating profits more than double in 2009. Adding The Walking Dead should spur further growth. AMC is one of four channels operated by Rainbow Media Holdings. IFC, Sundance Channel, and WE tv are the other three. Two related companies, IFC Films and IFC Products, distribute independent pictures and produce feature-length films.
Not impressed yet? Consider that without Madison Square Garden's heavy expenses dragging on profits, Rainbow should be able to produce enough profit to help Cablevision fulfill or even exceed Wall Street's estimates for better-than-20% earnings growth for the foreseeable future.
No matter. Investors either don't believe that Cablevision will produce outsized profits, or they're waiting for further proof there's gold at the end of its Rainbow. At 31 times trailing income, the stock looks expensive until you realize its forward P/E is closer to 17. "Addition to the S&P 500 and good forward P/E, but in all honesty, AMC's The Walking Deadwas the clincher for me. Another great addition that makes this network stand out from the crowd," wrote All-Star investor NinjaJew earlier this month.
by: Prince Damin
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