Analysts take stock of cable operators


NEW YORK -- Cable operators Cablevision Systems and Knology Inc. earned two very opposite Wall Street reviews for their free cash flow outlook this week.

Pali Research analyst Richard Greenfield radically downgraded his rating on Cablevision from "buy" straight to "sell," saying he fears that the company will spend a sizable amount of its available cash flow on new business ventures in the coming years.

"What worries us is that a meaningful portion of Cablevision's free cash flow over the next two years appears to be headed for investments in the live entertainment business," Greenfield argued.

In recent years, Cablevision had focused on its core cable system business, which the controlling Dolan family tried to take private several times without success.

But a going-private deal followed by an often-suggested cable systems sale to Time Warner Cable seems less likely in the face of recent developments, according to Greenfield. "We now believe the Dolans are focused on leveraging Cablevision's strong free cash flow to pursue a music/live-events venue roll-up that will enable them to transform/bolster one of their fledgling cable networks, Fuse."

His comments came after it recently emerged that the company is preparing to invest about $150 million in AEG Live for a 35% stake, with Ticketmaster set to acquire an additional 14% (HR 2/29).

"We believe the company has its sights set on multiple live entertainment venues across the country -- the acquisition of the Beacon Theatre in late 2006 and the Chicago Theater in late 2007 are only the beginning," Greenfield said. "Given (Cablevision CEO) James Dolan's love of music and the hiring of Jay Marciano in 2005, it now feels like Cablevision's strategic shift has been in the works for years."

Meanwhile, small cable operator Knology earned a bullish review from Miller Tabak + Co. analyst David Joyce this week. "Where else can you get an 11% free cash flow yield?" was his rhetorical question as he reiterated his "buy" rating and $15 price target on the stock. His long-term target stands at $21.

While Joyce slightly reduced some 2008 financial estimates to adjust for latest developments, he projected that Knology could boost operating cash flow at a compounded annual growth rate of 11.6% over the next five years.

While during the next six to nine months, small-cap stocks like Knology may remain out of favor due to recession fears, the stock could gain after that due to its strong free cash flow, Joyce argued.