New AI And Billing Systems Will Improve Efficiency, But Competition May Hinder Future Performance

Key Takeaways

• New billing and AI systems are expected to boost efficiency, reduce churn, and enhance customer satisfaction, potentially increasing margins and earnings.
  
• Expansion in broadband and unified branding is anticipated to drive revenue growth and strengthen brand position, improving financial outcomes.
  
• Competitive pressures and strategic uncertainties challenge Cable One's market share, pricing power, and future revenue growth in a dynamic industry landscape.

Catalysts

Provides data, video, and voice services in the United States.

• Introduction of a new billing system is expected to streamline operations, speed up product launches, and reduce costs, leading to increased operational efficiency and potentially higher net margins.
  
• Business Broadband growth driven by enterprise demand and new product offerings across carrier, wholesale, and enterprise segments is poised to boost revenue.
  
• Implementation of an advanced AI module to improve customer interaction and operational efficiency could enhance customer satisfaction, leading to reduced churn and higher earnings.
  
• Expansion of multi-gig capabilities and the deployment of intelligent Wi-Fi technologies are expected to support growing data usage, potentially increasing ARPU and boosting revenue in the long term.
  
• Consolidation of the Sparklight brand and integration into a unified platform is likely to enhance brand strength and operational efficiencies, contributing to better net margins and improved financial performance.

Cable One Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cable One's revenue will decrease by -2.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.9% today to 10.3% in 3 years time.
• Analysts expect earnings to reach $154.5 million (and earnings per share of $26.26) by about January 2028, down from $223.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $289.6 million in earnings, and the most bearish expecting $91.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.5x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the US Media industry at 13.8x.
• Analysts expect the number of shares outstanding to grow by 1.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.23%, as per the Simply Wall St company report.

Cable One Future Earnings Per Share Growth

Risks

• The expiration of the affordable connectivity program (ACP) resulted in a significant customer loss, and further churn from this cohort may impact future revenue and subscriber growth.
• Revenue
  
• The ongoing transition to a new billing system required a suspension of price adjustments for a substantial portion of the customer base, which potentially limits pricing flexibility and margin improvements in the near term.
• Net margins
  
• Anticipated pay-as-you-go internet service could be potentially dilutive to ARPU as value-conscious customers may choose lower-speed or intermittent service plans, although current results show it may not be immediately dilutive.
• ARPU
  
• There is significant pressure from competition, both in wired broadband from fiber and in wireless from fixed wireless access, which could limit Cable One’s market share and pricing power in some regions.
• Revenue
  
• The company faces uncertainty in strategic positioning, with questions regarding whether its focus should remain on consolidation as a rural cable operator or explore being part of a larger enterprise, affecting long-term growth strategies and capital requirements.
• Strategic positioning and potential acquisition costs

Valuation

• The analysts have a consensus price target of $485.0 for Cable One based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $825.0, and the most bearish reporting a price target of just $335.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $154.5 million, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 9.2%.
• Given the current share price of $357.79, the analyst's price target of $485.0 is 26.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.