Digital Transformation In Rural Areas Will Boost Broadband Adoption

Key Takeaways

• Expanding rural broadband access and premium internet service adoption drive long-term revenue growth and improved subscriber retention.
  
• Operational efficiencies, automation, and disciplined capital allocation reduce costs, lower balance sheet risk, and enhance future shareholder returns.
  
• Rising competition, cord-cutting trends, and high debt are straining revenue growth, margins, and flexibility, especially given focus on rural markets and ongoing heavy capital spending.

Catalysts

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

• The large-scale digital transformation in rural and underserved regions is expanding the addressable market for high-speed broadband-Cable One is well-positioned to benefit from ongoing infrastructure upgrades, government stimulus, and demographic trends driving greater broadband adoption in core markets, supporting long-term revenue and ARPU growth.
  
• Secular increases in demand for fast, reliable internet connectivity-fueled by remote work, rising data consumption (with 27% of customers exceeding 1TB/month), streaming, and growth in IoT-continue to underpin strong premium tier adoption (46% of customers on gig or higher plans), bolstering both revenue and net margin by encouraging migration to higher-margin services.
  
• The transition away from legacy video and the continued rollout of value-added broadband products (e.g., Ultimate Wi-Fi, SecurePlus, Lift Internet, Tech Assist, and the new mobile pilot) enables Cable One to increase ARPU, enhance subscriber retention, and tap into new sources of earnings growth.
  
• Enhanced operational efficiency and reduced costs from the completed migration to a unified billing and customer platform, combined with ongoing automation initiatives such as AI-driven tools, are expected to yield multimillion-dollar annual run-rate savings beginning in late 2025, improving long-term net margins and free cash flow.
  
• Disciplined capital allocation and deleveraging-using substantial free cash flow and recent asset monetizations to pay down over $0.5 billion in debt over two years-reduces balance sheet risk, lowers interest expense, and positions Cable One for potential share buybacks, ultimately supporting future EPS growth and shareholder returns.

Cable One Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cable One's revenue will decrease by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -32.2% today to 9.2% in 3 years time.
• Analysts expect earnings to reach $131.5 million (and earnings per share of $25.87) by about August 2028, up from $-496.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $163 million in earnings, and the most bearish expecting $103.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, up from -1.5x today. This future PE is lower than the current PE for the US Media industry at 18.6x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Cable One Future Earnings Per Share Growth

Risks

• Intensifying competition from fiber-overbuilders (now overlapping 53% of Cable One's footprint, up from 50% last quarter) and widespread fixed wireless/cellphone internet options is leading to elevated subscriber churn and negative net customer additions, resulting in flat or declining residential broadband revenue, which places sustained downward pressure on total revenue and impedes future growth.
  
• Persisting "cord cutting" trends are driving a steep decline in legacy video revenues (down $9 million or 15.8% YoY), a trend likely to accelerate as consumers shift to OTT/streaming, thus eroding a once-profitable segment and squeezing overall revenue and margins.
  
• Cable One's focus on smaller, rural, and less densely populated markets means future organic subscriber and revenue growth opportunities may be inherently limited, and significant ongoing capital expenditures for network upgrades and expansion (e.g., $68.4 million in Q2) could further compress free cash flow and net margins.
  
• Elevated leverage and a substantial debt load ($3.5 billion at quarter end, net leverage ratio 4.1x) stemming from acquisitions and continued buybacks increase balance sheet risk and limit the company's flexibility to weather industry disruption or fund future growth, potentially impacting earnings through higher interest expense or constrained investment capacity.
  
• Aggressive competitive pricing (e.g., cellphone internet and new fixed wireless offerings) and Cable One's heavy reliance on targeted promotions and segmented rate adjustments have resulted in elevated churn post-promotion and a need to balance ARPU stability against customer losses, increasing risk of revenue stagnation or margin pressure if the company cannot effectively optimize this balance over time.

Valuation

• The analysts have a consensus price target of $213.25 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 $421.0, and the most bearish reporting a price target of just $120.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $131.5 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $136.58, the analyst price target of $213.25 is 36.0% higher.
  
• 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.