Not many Wall Street analysts follow TCA Cable TV Inc.
closely, but several probably wish that they had.
Why? Put it this way: A year ago, TCA sold for $31 per
share. Dallas-based Hoak Breedlove Wesneski & Co. analyst Murray Arenson picked it up
Aug. 28 at $38, predicting that it would rise to $45. He revised that target Feb. 27, when
the stock had sailed past $50 per share.
On April 13, when TCA was selling for $59 per share,
Arenson set a new target: $65.
Riding that wave, Fred Nichols, TCA's chairman and
CEO, has some targets of his own.
They include getting bigger -- following up last
year's joint-venture deal with Tele-Communications Inc. by taking on more debt to
make system acquisitions.
"The number that I have in mind, with the leverage
that we have in place, is that we can buy $150 million worth of properties right
now," Nichols said. The longtime TCA president became chairman and CEO after founder
Robert M. Rogers died in September.
At its current rates of debt repayment, TCA's spending
limit will rise to $200 million next year, he said. "Whatever that'll buy"
in TCA's cluster areas of Texas, Arkansas and Louisiana, Nichols is willing to spend.
TCA's debt load is currently about 3.3 times its
annual cash flow -- lower than that of any other large MSO. And TCA enjoys that position.
As Nichols noted, the company's investment-grade bond rating recently enabled it to
sell $200 million in 30-year bonds at the thrifty interest rate of 6.5 percent.
But TCA would gladly move up into the 4-times-cash-flow
leverage range if the right system deals presented themselves. As Arenson noted, the fact
that TCA sold $200 million in bonds, up from the $150 million that it had planned to
raise, shows that the MSO is in the market for systems.
TCA also plans to aggressively deploy cable modems
throughout its mostly rural, "classic" systems.
MODEM MADNESS
How aggressively? If things go as planned, Nichols hopes to
be able to market high-speed data to some 500,000 of his 860,000 subscribers by the end of
the year.
Company officials have been telling analysts that they
conservatively expect to be marketing modems to 240,000 of TCA's 1.2 million homes
passed by year's end, and to have 4,000 to 5,000 modems installed by then -- or about
2 percent penetration one year after signing up its first cable-modem customers in
Bryan/College Station, Texas.
Arenson has penciled in an estimate of $1.5 million in
modem revenue at TCA this year -- slightly above modem expenses, or enough to add about
one penny per share to the company's estimated $1.76 per share in 1998 net income.
Taking on debt, or leverage, to grow used to be anathema at
TCA.
In the 1980s, when other operators were piling on debt from
acquisitions -- and becoming well-known to bond traders and investment bankers in the
process -- TCA was hunkering down.
"These guys did a debt deal recently," Arenson
said. "Before that, you'd have to go back to 1982 or 1983 to see them do
anything."
"We lived in a part of the country that was in a
depression," Nichols said recently, recalling the oil and real estate busts in Texas.
"Many of our friends were in very bad financial straits. The way that they got in
trouble was owing too much money. So our company structured itself not to owe too much
money."
The TCI joint venture, which closed in February, added
150,000 subscribers in Texas and Louisiana to the TCA-managed fold. To get to 80
percent-ownership of that joint venture (which also includes 155,000 existing TCA
subscribers), TCA assumed some $248 million in TCI debt, or more than five times the $47
million in debt that TCA contributed. Analysts expect TCA to eventually own those
subscribers outright.
TCA expects to end up with some systems that are being shed
from TCI's pending 1.06 million-subscriber joint venture with Time Warner Cable in
south Texas. And there are other systems within TCA-dominated markets that "will
become available to us," Nichols predicted.
A RARE MONEYMAKER
Even after the TCI joint venture, TCA is still only about
the 16th-largest MSO. So it's not surprising that it hasn't had a huge following
on Wall Street.
For years now, though, TCA has been doing some pretty
amazing things for a top 20, publicly traded MSO.
For example, it generates net income, and not just cash
flow (earnings before interest, depreciation and amortization charges).
It even pays quarterly dividends to shareholders, currently
16 cents per share.
Alan Gould, formerly of Oppenheimer & Co. and now at
Gerard Klauer Mattison Inc., said he's recommended TCA in the past because it's
a cable vehicle for investors with little appetite for cash-flow stories and a desire to
see profits.
"TCA was a great example of how a well-managed cable
operator, if it stopped making acquisitions, could not only generate earnings, but have
some accelerating earnings growth," he said.
Another reason why Gould recommended TCA was such
fundamentals as solid clustering in areas that are outside of the urban and suburban
markets where SBC Communications Inc.'s Southwestern Bell Telephone Co. unit, for
example, was likely to compete for video customers.
Then, there are its operating numbers.
"Their free cash flow per share after capital
expenditures is typically better than even their reported earnings per share," Gould
said. "The company's had the cash to buy back stock when its stock was cheap, to
make acquisitions and to maintain its plant."
SOME FEARS
One analyst who pays attention to TCA held back from
recommending the stock for a reason that sounds ironic: The analyst said he was concerned
about TCA's CableTime division, which is the country's biggest third-party
advertising-sales provider. Cable ad sales is a fast-growing business, and CableTime is a
dominant player among small systems. Ad sales grew to 18 percent of TCA's revenue
last year, up from 14 percent in 1996, and Arenson estimated that it will climb to 20
percent in fiscal-year 1998.
But the profit margins in that business are slimmer than
TCA's overall margins. And, the analyst said, there's always the possibility
that systems could take sales in-house if CableTime tries to raise its rates to make out
on that business.
TCA's fans on Wall Street said such fears are
misplaced. For one thing, Gould said, "on a free-cash-flow basis, [CableTime]
arguably has higher margins," because the capital expenditures for that business are
lower.
CableTime has "a healthy amount of repeat
business," he added, "because typically, TCA can do [ad sales] more
efficiently" than small cable systems can. "If an operator was getting a 20
percent margin on its ad sales, TCA can guarantee them a higher number and do all of the
work," Gould said.
OVERCOMING DEPRESSION
TCA's fallow period came in September 1989, when it
bought systems with 82,000 subscribers in Bryan-College Station, Paris and Victoria,
Texas; Clovis, N.M.; and Greenville, Miss.
"By the time we were ready to get over the depression
that was going on in Texas and buy systems, the cable industry went into a
depression," Nichols said. "By 1995, we were really just scrambling, trying to
find systems."
TCA was able to pick up another 72,000 subscribers in San
Angelo, Texas, and El Dorado, Fayetteville and Russellville, Ark. It then turned to
partnerships, including one with Donrey Media in which it picked up 60,000 subscribers in
Arkansas, Oklahoma and California.
Those deals also created trade currency: TCA swapped the
Vallejo, Calif., system to TCI for its Fort Smith, Ark., system; and it is trading the
Bartlesville and Blackwell, Okla., systems, among others, to Cable One for systems
including Lufkin, Texas, "which is 19 miles down the road from one of our systems in
Nacogdoches [Texas]."
The TCI deal also brought other benefits.
"One of the reasons why we did it -- and I guess
it's taboo to say it -- was that we wanted to save money on programming costs, and
TCI brought that to the table," Nichols said.
But TCA also earned a financial benefit that was painful to
administer: The company laid off about 10 percent of the employees in the combined
systems, Nichols said.
"We don't like the idea of reducing people,"
he said. "To our company, that is one of the worst things that we can do ... In the
1980s, while we were losing 10 percent or 15 percent of our customer base in some of our
markets, we never let people go."
SLOW ON DIGITAL
Nichols also hopes to tap TCI's technology expertise,
and he's already learned something. He's become a digital-video fan,
"mainly because of the navigator," he said. Digital also helps to preserve
bandwidth for new services that might come along, such as Internet-protocol telephony.
But TCA plans to go slow on digital video, Nichols said,
until the next generation of standardized converters arrive.
Nichols used to feel that way about modems, too. But
TCA's supplier, Terayon Communication Systems, has a product that's been shown
to work even in "noisy" cable plant that doesn't have a lot of fiber. In
fact, TCA is deploying the modems in its hometown of Tyler, Texas, where the system
doesn't have any fiber at all -- just coaxial cable.
"We've just decided that we're going to go
with it," Nichols said.
As TCA continues to "go with it," its days of
Wall Street anonymity may go away, but Nichols doesn't necessarily agree. TCA
hasn't gotten much coverage largely because so much of its stock has historically
been controlled by insiders, he said. (One potential concern for Wall Street came with
Rogers' death, when some 15 percent of the company's stock was placed in a trust
benefiting his widow, his grandchildren and a charitable foundation. Under the terms of
Rogers' will, though, TCA must be notified about any potential stock sale, and the
company has the right to match any such offer.)
Arenson said TCA's results are already getting
noticed. He recently accompanied Nichols to visit analysts in New York and Boston, and
many of them were already well-aware of the little MSO from Tyler.
"People are starting to pay a little closer attention
to their story," Arenson said.
