Cable One’s stock price has taken a beating over the past six months, shedding 64.8% of its value and falling to $36.31 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Cable One, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Cable One Will Underperform?
Even with the cheaper entry price, we’re cautious about Cable One. Here are three reasons why there are better opportunities than CABO, plus one stock we’d rather own.
1. Decline in Residential Data Subscribers Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Cable One, our preferred volume metric is residential data subscribers). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Cable One’s residential data subscribers came in at 870,000 in the latest quarter, and over the last two years, averaged 4.3% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Cable One might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Cable One’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 17.5% for the last 12 months will decrease to 13.5%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, Cable One’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Cable One doesn’t pass our quality test. After the recent drawdown, the stock trades at 4× forward EV-to-EBITDA (or $36.31 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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