Cable One (CABO) is a domestic cable company operating in non-urban secondary markets. With a unique internet-centric strategy, it focuses on providing internet services rather than bundled packages. It enjoys a monopoly-like position, offering superior internet speeds at lower prices compared to its competitors. The company aims to capture additional market share, which could lead to an annual increase of 12 per share in free cash flow (FCF) through 2020. Additionally, CABO’s ability to raise internet prices by 5% annually and its declining capital intensity contribute to the potential increase of 27 and 7-8 per share in FCF, respectively. Supported by a strong balance sheet, CABO plans to repurchase shares, adding 69 per share to FCF and driving the overall FCF per share to 80-90 by 2020, a significant growth from 15 in 2015.
The market dynamics and CABO’s strategy position it for future success. The company’s competitive advantage lies in its limited fiber-to-the-home competition and its dominant position as the primary provider of high-speed internet services in its markets. This, along with its growing internet subscriber base, can capitalize on the secular tailwinds of e-commerce, over-the-top services, and the Internet of Things. With an attractive valuation, even in a downside scenario, where FCF remains steady state at the 2016 level, CABO is considered undervalued. Its strong balance sheet, potential for market share gains, and the ability to increase internet prices and decrease capital intensity further support its potential for future growth.
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