Mark Travis said he likes “redneck stocks.” On April 24, The CIO of Intrepid Capital Funds recommended:
My RealMoney article from December 7, 2007:
CSG Systems (CSGS) is a leading provider of customer care and billing services for cable operators, including Comcast (CMCSA), Echostar (DISH - Annual Report), and Time Warner Cable (TWC). Since July, when the company announced in a shortfall in cash flow from operations, the shares are down more than a third. The current price may be a good opportunity for investors to buy a stable cash flow generator.
The cash flow shortfall in the second quarter was “due to unexpected changes in certain operating assets and liabilities at quarter end” as was largely made up in the third quarter. But don’t get me wrong - there are plenty of good reasons to explain the recent share price decline.
Let’s start with customers - the relationship with Comcast has been touchy at times, stemming from lawsuits related to Comcast’s 2002 acquisition of AT&T (AT&T’s former cable assets). That relationship seems stable now, but things could always get dicey again.
Then there is all the talk about Echostar being taken over. A merger with a company like AT&T (T - Annual Report) that does not use CSG’s services could mean CSG loses its number two client.
Next, even without any mergers and acquisitions activity going on CSG stands to lose when its customers have fewer bills to send out. Increased competition from telephone companies like AT&T and Verizon (VZ - Annual Report), along with trouble related to the housing market, have led both Echostar and Comcast to cut customer growth estimates recently.
So, suffice to say there are plenty of reasons to be concerned about CSG’s prospects in the near term. Now we have to figure out whether today’s one-third-off sale fully reflects those potential concerns. I think it does.
The Positive Side
If there is one thing to like about CSG Systems, it is that the earnings are predictable. Consider the last 12 quarters, which I charted below.
Source: Zacks Research Wizard
The knock against predictability, of course, is that the earnings are going nowhere. They have been stuck in neutral at $14-$16 million per quarter for much of the last three years. On the other hand, the company generates tons of cash - $105 million worth of free cash flow (cash from operations less capital expenditures) over the last 12 months.
And it uses most of that cash flow to buy back stock. In the third quarter of 2007 there were 17.5% fewer shares than there were in the same quarter last year. As a result, the earnings per share are far from stagnant. In fact, the last 12 months of EPS were 16.1% higher than the preceding 12 months.
Now that the share price has come down, the buybacks are having a bigger impact than ever. At the current pace, the company could take itself private within six years.
Free Cash Flow Yield
With $95 million in free cash flow and a current enterprise value of $638 million, CSG is sporting a free cash flow yield of more than 16%. Even if the $65 million they spent on acquisitions this year is deducted, the free cash flow yield would still be a healthy 6.2%, offering a solid risk premium over Treasuries.
With that kind of risk premium, investors look to be well compensated for the risks I outlined.
Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.
The topic of a la carte cable service (consumers being able to choose and pay for specific channels they want, and no “basic” tier) has been a big topic of discussion from time to time. Today it gained new attention due to comments by FCC Chairman Kevin Martin (via Reuters):
“An a la carte regime would enable viewers to buy their television channels individually, in smaller bundles, or in the large bundles currently offered,”
The way cable rates are set has little to do with the consumers of entertainment content, which is why we seem to have progressed from 57 channels to several hundred… and still nuthin’ on. We each pay for a package of channels that includes one or two we’d like to have and dozens we don’t care about. Meanwhile, some of these programmers pay the cable company for distribution while others get paid by the cable company for the right to distribute the content.
According to the Reuters article, “cable operators have been reluctant to allow customers to choose their own program bundles, claiming that it would raise prices for consumers.” So what? Consumers frequently trade higher prices for things they want more. The real issue is whether the cable companies would continue to get the kickbacks for certain channels, or whether the consumer would buy any channels at all if they found out the one they wanted was the only one in the 20 they were actually paying for. The article concludes:
Kyle McSlarrow, chief executive of the National Cable and Telecommunications Association, said at a press conference afterward that the industry should not be forced by government to offer networks on an a la carte basis.
Which is the real problem. Who do you trust more: the government or the cable operators. The chances are it is neither, and that is why Joost, YouTube and other options are the real threat to content providers and distributors.
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