by Will Ashworth | September 30, 2013 7:00 am
Investors know most of John Malone’s story … but probably not all of it.
Malone has a net worth of $6.7 billion, making him the 60th wealthiest person in America according to Forbes. He built Tele-Communications into a cable giant over the span of nearly 25 years, then sold it to AT&T (T) in 1999 for $48 billion.
Liberty Media (LMCA) was then spun off from AT&T in 2001, while Discovery Holdings was spun off from Liberty Media in 2005. And finally, Ascent Capital Group (ASCMA) was spun off from that in 2008.
I had never heard of ASCMA until I accidentally entered its symbol (thanks auto-fill!) instead of Ascena Retail Group (ASNA) for a stock quote one day. What I found was the nation’s second-largest home alarm company behind only ADT (ADT). ASCMA divested all of its other businesses in late 2010 and used some of those proceeds to buy Monitronics for $1.2 billion.
While it continues to look for bolt-on acquisitions for Monitronics — in July, for example, Ascent paid over $500 million for Security Networks, the 14th largest residential alarm company in the U.S. — it also plans to make investments outside the alarm industry. For some that might be a turn-off … but the fact that John Malone owns 35% of the voting suggests to me that Ascent has more excitement up its sleeve. I’m not necessarily saying this is a baby Berkshire Hathaway (BRK.B), but it sure is off to a good start.
As it stands now, Ascent has an enterprise value of $2.5 billion including the Security Networks acquisition, which is 7.2 times adjusted EBITDA. By comparison, ADT’s multiple sits at 8.5. In addition, it trades at 9.7 times cash flow vs. 12.1 times for ADT.
It also boasts more than 1 million existing alarm contracts, 11% growth in its subscriber base and more than 62% of the market held by local or regional independents. All in all, Ascent’s future looks very bright indeed.
See, the key to Ascent Capital’s business model is operating asset-light businesses that have high margins and provide stable and leverageable cash flow. Monitronics fits the bill nicely with a recurring monthly revenue (RMR) business model. And with the Security Networks acquisition, Ascent acquired 200,000 accounts and $8.8 million in RMR. That’s $105.6 million per year. More importantly, Security Networks’ RMR and subscriber base are expected to grow faster than Monitronics.
Now here’s where stable and leverageable cash flow comes into play. Including the debt incurred to buy Security Networks, Ascent Capital owes $1.56 billion. On a pro forma basis, it would have paid $57 million in interest through the first six months of 2013, which is $114 million annualized.
The good news: Its cash flow for the first six months of 2013, without Security Networks, was $101 million — or $202 million annualized. In the first half of the year, capital expenditures were just under $4 million. If you double that and add some wiggle room, total capex for the year should be around $10 million.
Subtract that and you have $78 million in cash left over with additional contributions from Security Networks still to come. The bottom line: As long as Ascent continues growing cash flow at 25% annually, there’s no reason to be alarmed (bad pun) about its level of debt.
The one downside for Ascent Capital compared to ADT is operating margins. In June’s second quarter, ADT had a gross margin of 89% and an operating margin of 23%. Meanwhile, Ascent Capital’s gross margin was 85% and its operating margin 19% — a 400 basis-point differential. That’s definitely something to be aware of.
But year-over-year, ASCMA’s Q2 operating margins actually increased 380 basis points, on top of a 450 basis-point improvement the year before. So in the span of 24 months, it’s virtually doubled its operating margin … with more to come.
Not sold yet? Consider this: ADT and Ascent Capital are spinoffs. Since ADT gained its freedom in October of 2012, the stock has gained 15%. Ascent Capital’s freedom came four years earlier, in September of 2008. It’s up nearly 190% since then, and more than 50% since ADT’s first day of trading.
There’s no question which has been the better stock. The question is if it will remain the better stock — and the answer is absolutely.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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