In an effort to bring the best 4G service to its customers, Verizon (NYSE:VZ) stepped up Tuesday, announcing it was buying $3.6 billion in wireless spectrum from a consortium that includes Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC). Comcast will receive the lion’s share of the proceeds, estimated to be $2.3 billion. Despite the windfall, I recommend investors sell Comcast and buy Cablevision (NYSE:CVC) instead. Here’s why.
As part of the spectrum sale, Comcast and Time Warner Cable announced they were winding down their Clearwire cable-branded 4G mobile broadband service over the next six months, opting instead to resell Verizon’s wireless products nationally. Stifel Nicolaus’s Christopher King liked the decision and raised CMCSA stock from “hold” to “buy” with a $32 price target.
King’s rationale is it takes Comcast out of the wireless competition while filling gaps in its product line. Maybe so, but I doubt very much you would see this type of deal in Canada between BCE (NYSE:BCE) and Rogers Communications (NYSE:RCI), which are mortal enemies. Unless I’m missing something, once the deal is done and Comcast is in bed with Verizon, it’s going to be awfully difficult extricating itself from the relationship. While Comcast gets a 64% return on its five-year spectrum investment, in the long term, it loses its independence when it comes to wireless. That short-term gain could come back to bite them in the you-know-where. We’ll see.
Apples and Oranges
Comparing Comcast to Cablevision is like comparing an Aston Martin to a Honda. They are two completely different beasts. However, given Comcast’s withdrawal from the Clearwire wireless brand, CMSCA and CVC are not as dissimilar today as they were a month ago. Both are cable companies offering TV, Internet and voice. Both also own various media properties. The only difference is size. Otherwise, they are two very similar businesses — one whose stock is worth 55% less today than a year ago (CVC) and another that’s up almost 12% in the same 52 weeks (CMCSA). The question is whether this sizeable gap in performance is warranted.
Mark Boyar, head of Boyar Asset Management, owns Cablevision stock. He believes the Dolan family, which controls 71% of the votes, is positioning the company to be sold. With the exception of a few properties like Newsday and Clearview Cinemas, it’s more of a pure-play cable company since spinning off Madison Square Garden (NYSE:MSG) in 2010 and AMC Networks (NASDAQ:AMCX) in June.
Boyar believes Cablevision could sell for as much as $30 per share, given free cash flow in 2011 will be more than $2 per share. Even if the Dolans decide to hang on to the company, it’s definitely cheap at 6.9 times free cash flow as of Tuesday. For comparison, Comcast trades at 9.7 times FCF and Time Warner Cable at 8.4 times. Of the two bigger rivals, Time Warner Cable likely would be more interested because its stranglehold in New York City would mesh nicely with Cablevision’s presence on the outskirts of town. The threat of a sale should at the very least keep the stock from falling much below where it is today.
Cablevision’s capital requirements are diminishing. Although CVC has had a disappointing year, free cash flow remains strong. With a dividend yield of 4%, you’re being paid to own its stock until earnings improve or someone like Time Warner Cable comes along and scoops it up. That same scenario isn’t playing out at Comcast. For this reason, Cablevision’s upside appears greater.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.