Company Overview: Cable One, Inc. (NYSE: CABO) is a telecommunications company that operates in 24 Western, Midwestern, and Southern states, providing integrated data, video, and voice services through its Sparklight and Clearwave brands. It offered broadband services to roughly 1.13 million household and commercial clients out of over 2.6 million residences passed, and Gigabit (GB) data services to about 98% of its residences passed as of June 30, 2021. CABO earns most of its income from three main product lines: 1) Residential Data, 2) Residential Video, and 3) Business Services.

CABO Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Growth in Revenues: Revenues increased 22.37% to USD 401.75 million in Q2FY21 from USD 328.30 million in Q2FY20, mainly due to USD 50.6 million generated from the Hargray acquisition in May 2021 and improved margins in the residential and business product lines.
• Significant Improvement in Adjusted EBITDA: Its adjusted EBITDA improved to USD 213.22 million in Q2FY21 from USD 163.16 million in Q2FY20, owing to an increase in net income.
• Increase in Net Income: The net income for Q2FY21 was USD 106.15 million vs. USD 62.54 million reported in Q2FY20, representing diluted earnings per share (EPS) of USD 16.68.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Steady Dividends

On August 20, 2021, CABO announced a quarterly cash dividend of USD 2.75 per share, which was paid on September 17, 2021, to shareholders of record on August 31, 2021. Over the last five years, the company has regularly paid dividends, as also reflected in the chart below (every D represents a dividend payment):

Consistent Dividends (Data Source: Refinitiv)

Acquiring Hargray

On May 03, 2021, CABO paid USD 2.0 billion in an all-cash transaction to acquire the remaining ~85% stake in Hargray Acquisition Holdings, LLC, a facilities-based regional communications provider. Hargray serves approximately 125,000 residential and corporate clients in 14 markets across Alabama, Florida, Georgia, and South Carolina. This acquisition increases CABO's footprint in the Southeast US and allows the company to benefit from Hargray's fibre expansion experience and expertise.

PSU and Subscriber Data in Q2FY21: A PSU (primary service unit) represents a single subscription to a particular service offering.

• CABO raised its total residential PSUs (including data, voice, and video) in Q2FY21 to 1,305, up 15.28% from 1,132 in Q2FY20.
• The total business services PSUs were 152 in Q2FY21 vs. 129 reported in Q2FY20.
• In Q2FY21, the number of residential customer relationships amounted to 1,032, representing a 17.81% increase from 876 relationships recorded in the prior-year period, whereas the number of business-customer relationships grew 18.60% year-over-year to 102 in Q2FY21.
• The reported average revenue per user (ARPU) for business services was USD 263.86 in Q2FY21 compared to USD 228.11 in Q2FY20.

Balance Sheet & Liquidity Position

• Decline in Cash Balance: The firm had a cash balance of USD 448.97 million at the end of Q2FY21, down 21.91% from USD 574.91 million available at FY20 end.
• Improvement in Cashflow from Operations: Operating cash inflow in H1FY21 was USD 347.63 million vs. USD 272.20 million in H1FY20.
• Increase in Debt: CABO's total outstanding debt amounted to USD 3.86 billion at Q2FY21 end, higher than the reported total debt of USD 2.18 billion as of December 31, 2020.

Key Metrics: In Q2FY21, CABO's EBITDA and net margins were 51.3% and 26.7%, vs. the industry median of 26.8% and 8.4%, respectively. In addition, ROE for the current quarter was 6.5%, higher than the industry median of 3.9%.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 56.17% of the total shareholding, while the top 4 constitute the maximum holding. T. Rowe Price Associates, Inc. and Graham (Donald E) hold the maximum stake in the company at 13.02% and 8.75%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis

• Geographic Concentration Risk: The Mississippi Gulf Coast region and the greater Boise, Idaho region have the most customers for the company. As a result, any unfavorable economic upturns in these regions could negatively impact CABO's overall performance.
• Increasing Programming and Retransmission Costs: Due to higher programming expenses, retransmission fees, and consumer cord-cutting, CABO's sales margins on its residential video services have declined in the last few years, accounting for 25.1%, 28.7%, and 32.0% of the total revenues in FY20, FY19, and FY18, respectively.
• Dependence on Third-Party Suppliers: CABO relies on a few third-party suppliers and licensors for some of the hardware and software required to offer its services. If it fails to obtain quality IT equipment from these vendors in a timely and cost-effective way, its ability to fulfil its clients' orders may be affected.
• Technological Risk: Cyber-attacks, such as distributed denial of service assaults, ransomware, virus dissemination, and natural catastrophes (including extreme weather), might cause network system shutdowns or other service interruptions, which could disrupt the company's services. 

Outlook

• Going ahead, CABO plans to invest more capital in infrastructure upgrades in existing and newly acquired markets and expand high-speed data services in regions where its consortium was named the winning bidder in the Federal Communication Commission's (FCC) Rural Digital Opportunity Fund Phase I auction.
• It also intends to explore broadband-related acquisition and investment opportunities in rural markets while also focusing on organic growth via market expansions.
• The company stated that its existing cash balance, amounts available under its credit facilities, and operational cash inflows will be sufficient to fund the financing for these goals during the next 12 months.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the past month, CABO corrected ~13.22%. The stock is currently trading below the mid-point of its 52-week range of USD 1,674.35 to USD 2,326.80. We have valued the stock using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering its robust EBITDA and net margins and strong ROE. We have taken peers like Charter Communication, Inc. (NASDAQ: CHTR) and Altice USA, Inc. (NYSE: ATUS). Considering the significant increase in top and bottom-line performance, strategic expansion plans, improvement in ARPU, steady dividend yield, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 1,727.00, down ~0.17% as of October 13, 2021, 2:34 PM ET.

CABO Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices. 

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