Investors Early to the Dolans' Garden Party at Cablevision

By MARTIN PEERS Talk about short memories. Just a year ago Cablevision Systems shares were afflicted with the "Dolan discount," so named for the family that controls the company. Today, with its stock up 47% since March, the New York cable operator enjoys a "Dolan premium" to its peers. Both Comcast and Time Warner Cable trade on multiples of enterprise value to earnings before interest, taxes, depreciation and amortization of about five times, compared with Cablevision's 6.7. The premium is hard to justify. Yes, Cablevision deserves credit for its operational results, including the 151% jump in free cash flow in the first quarter -- better than either of its bigger peers. It has signed up a higher portion of its customers for higher-end digital cable, phone and Internet services. The flip side, of course, is that Cablevision has less opportunity for growth. And much of the credit for the cable performance should accrue to Chief Operating Officer Tom Rutledge, whose employment contract is up in December. While he may very well re-sign, it isn't a slam dunk. And offsetting the sterling cash generation is Cablevision's history of ill-conceived acquisitions (Newsday, the Wiz, Clearview Cinemas) and other investments (Fuse, a music TV network), which worried investors last summer. Then there is its gradual expansion into live entertainment, spearheaded by the Madison Square Garden and Radio City acquisitions in the 1990s. Live entertainment is inherently volatile. The Garden's profitability has bounced around like a Knicks basketball, from $4.5 million in operating income in 2003 to $117 million a year later, down to $53 million in 2005 and then to a loss in 2006. A year later profit returned. Cablevision hasn't helped matters by moving Fuse into the Garden since the start of 2008. A restatement of 2007 divisional results for the transfer reduced MSG's operating income 17%. The premium rating has widened since the company said it was exploring a spinoff of the Garden. Given Cablevision's history of announcing possible restructurings that aren't consummated, though, the applause is a little premature. CEO Jim Dolan feels Cablevision doesn't get credit for the Garden's asset value. He is probably right. But the considerable value of the Knicks and Rangers, in particular, comes mainly in their status as trophy assets -- best realized in a sale, not a spinoff. And Cablevision has ruled out selling. The real benefit for Cablevision shareholders would come if, as is speculated, Mr. Dolan moves with MSG. Only then, by creating the real prospect of a sale of the valuable cable business, would Cablevision deserve a premium. Write to Martin Peers at martin.peers@wsj.com