ModernGraham Valuation: Cablevision Systems Corp (CVC)

Company Profile (obtained from Google Finance): Cablevision Systems Corporation (Cablevision), through its wholly owned subsidiary CSC Holdings, LLC (CSC Holdings, and collectively with Cablevision) and their subsidiaries operates in the United States based on the number of video customers. As of December 31, 2012, the Company served approximately 3.2 million video customers in and around the New York metropolitan area and in Montana, Wyoming, Colorado and Utah (the Optimum West service area). The Company’s cable television systems in the New York metropolitan area consists of the metropolitan cluster of cable television systems under common ownership in the United States (measured by number of video customers). In June 2013, Bow Tie Cinemas completed the acquisition of Clearview Cinemas from Cablevision Systems Corp. In July 2013, Charter Communications Inc and Cablevision Systems Corp announced the completion of acquisition of Cablevision’s Bresnan Broadband Holdings, LLC (Optimum West).

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
6. Moderate PEmg ratio – PEmg is less than 20 – PASS
7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
3. Earnings Stability – positive earnings per share for at least 5 years – PASS
4. Dividend Record – currently pays a dividend – PASS
5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

Balance Sheet – 9/30/2013 

Earnings Per Share

Earnings Per Share – ModernGraham 

Conclusion:

Cablevision Systems Corp is a company that has demonstrated solid growth in EPSmg (normalized earnings) in recent years, but does not satisfy the requirements for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company’s failings are its current ratio being too low, and its lack of stable earnings, earnings growth, and dividend payments over the 10 year period.  For the Enterprising Investor, the company fails because it has too much debt relative to its current assets.  Value investors seeking to follow Benjamin Graham’s methods should seek a lower risk level than is present in Cablevision Systems Corp by researching companies that are suitable for Defensive and Enterprising Investors.  From a valuation side of things, the company’s recent growth in EPSmg from -$0.54 in 2008 to an estimated $0.95 for 2013 results in a strong valuation.  The market is currently implying a growth rate estimate of 4.73%, which is significantly lower than what has been seen historically.  As a result, the company would appear to be undervalued presently.

What do you think?  Do you agree that Cablevision Systems Corp is undervalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

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Disclaimer:  The author did not hold a position in Cablevision Systems Corp (CVC) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill