Movin' on up

Street gives cable sector high marks

The cable sector last week won its second Wall Street upgrade in a month, with Credit Suisse in particular betting that Charter Communications and smaller operator Mediacom Communications will outperform during the second half of the year.

Analyst Bryan Kraft upgraded the whole industry to "marketweight," citing his "bullish view toward cable fundamentals, cable's solid long-term strategic position, attractive valuations on 2008 estimates and our view that cable industry consolidation will continue."

Just late last month, Citigroup analyst Jason Bazinet upgraded the cable sector, arguing that "valuations look compelling" as the market is undervaluing sector industry players' long-term growth prospects.

He raised his rating on cable giants Comcast Corp. and Time Warner Cable from "hold/medium risk" to "buy/medium risk" and boosted his price targets by $3 to $33 and $2 to $44, respectively.

In his report, meanwhile, Credit Suisse's Kraft argued that if his financial estimates for cable operators in 2008 are true, "then current valuations are unsustainably low."

Among positive factors for the industry, Kraft also cited "improving dynamics between cable and programmers" and a lack of real price competition with telecommunications firms.

"Cable's unique position in the next couple of years as the largest advanced advertising platform means that cable will play a key role in the evolution of the network advertising model and will result in a shift in leverage from the programmers to the cable operators," the Credit Suisse analyst suggested.

As a result, he upgraded shares of Mediacom and Charter to "outperform" from "neutral" and boosted his target prices from $9 to $14 and from $2 to $6, respectively.

"As valuations across the sector appreciate, Charter and Mediacom should see the highest returns to equity due to their high financial leverage," he explained.

In addition, Kraft predicts that both companies will see improving business momentum from here on out.

In other stock picks, he raised his price target on Time Warner Cable by $2 to $43 and on Cablevision Systems Corp. by $7 to $36, while maintaining his "neutral" rating on them.

Kraft said he continues to rate cable giant Comcast's stock at "outperform" with a $32 target.
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