Don't Chase These Cable Outfits

 | Jul 01, 2013 | 7:00 AM EDT  | Comments
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Cable stocks were market leaders last week amid rumors that entertainment mogul John Malone was showing takeover interest in both Cablevision (CVC) and Time Warner Cable (TWC). Those stocks gained 12% and 10% for the week, respectively, making them last week's best performers in the S&P 500.

My guess is that the rumors about Malone's intentions are correct. But, even if they are, I wouldn't chase these stocks.

Let's start with an obvious balance-sheet consideration that I believe many investors overlook. Cablevision has a negative net worth of $6.6 billion, or $26.70 per share. That's a gigantic hole where stockholders' equity should be.

Time Warner Cable's balance sheet is much better. Its net worth is positive by $6.8 billion, almost a mirror image of Cablevision's. That works out to $23.70 a share.

Still, I don't find Time Warner Cable attractive at Friday's close of $112.48. That is about 4.7x book value and 20x earnings -- stiff multiples for a company that's expected to post a small decline in earnings this year, and for one that's in a fairly mature business.

Cablevision, for its part, is expected to post earnings of about $0.43 a share this year. That means its stock, at Friday's closing price of $16.91, fetches 39x estimated earnings. Perhaps the entities associated with John Malone are willing to pay more but, if a deal ends up working out, I doubt the takeover premium will be huge.

The cable companies are also in a ticklish competitive situation. Thanks to multiple new technologies, there are more and more ways for people to get entertainment and information. The cable companies have to sweat about Netflix (NFLX) and Hulu, not to mention satellite dishes. They must worry about wireless transmission of content via smartphones and tablets. Their grip on content is loosening.

Of these two names, analysts clearly prefer Time Warner Cable over Cablevision. The former garners 17 "buy" ratings out of 31 published opinions, while the latter gets only six out of 23. I, too, prefer Time Warner, mostly because of its better balance sheet. But I don't like either stock.

John Dorfman is chairman of Thunderstorm Capital LLC, a money-management firm in Boston. He can be reached via email here.

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