Picture of optimism after Cable Show
Analysts see upswing among operators after rough Q4NEW YORK -- Big cable stocks are down year-to-date, underperforming the broader S&P 500 index amid still-challenging overall market trends, debt concerns and investor fears over intense competition.
But several analysts said they came out of the annual Cable Show that ended Friday in Washington with renewed conviction that the cable industry is recession-resistant and gaining subscriber momentum after a tougher year-end 2008 period.
"Cable is holding up very well," Sanford C. Bernstein analyst Michael Nathanson said in a report summarizing key themes from the industry gathering. "The business is growing everywhere (that is, in every market), even in the weakest/highest unemployment geographies. In the hallways, there is general confirmation that first-quarter trends have improved from the run rate of the fourth quarter."
Miller Tabak analyst David Joyce took home the same lesson.
"One point that should have been clear from the Cable Show is that subscriber growth was trending better in the first quarter than in the fourth quarter, so the cable companies should still post mid-single-digit revenue and operating cash flow growth in 2009, something that not many companies can claim," he said in an interview.
Still, concerns over slower growth and competition from satellite TV providers and telcos such as Verizon's FiOS TV and AT&T's U-verse video services have been an overhang for many cable stocks. The credit crunch and overall high debt load in the industry -- evidenced by Charter Communications' recent Chapter 11 bankruptcy filing -- also have scared off some investors in recent months.
Pali Research analyst Richard Greenfield recently defended Cablevision Systems, which he rates "buy," against all those concerns in a note titled, "Why You Should Love, Not Hate, Cablevision."
He started out by saying that "equity investors remain cautious about Cablevision shares." One of his bullish conclusions: "While investors continue to fear Cablevision's exposure to Verizon, Cablevision has consistently outperformed." He also said that management has taken care of all debt maturities until 2011, when $1 billion comes due.
Cablevision shares are down 11.9% year-to-date when adjusted for dividends and stock splits, closing at $14.71 on Friday. Shares of Comcast finished at $13.80, down 14.2% since Dec. 31. In comparison, the S&P 500 index is off 6.7%.
Collins Stewart analyst Thomas Eagan also left the Cable Show with positive feelings about the sector giant, which he rates a "buy."
"It does appear that the company wants to use its free cash flow to refinance up to $2.2 billion in debt this year and have a net reduction in debt, a prudent strategy given these economic times," Eagan said, adding that Cablevision might also push some capital expenditures into 2010 to free up money.
Most analysts predict the biggest near-term challenges among cable biggies for Time Warner Cable, given its high debt load following the spinoff from Time Warner.
Wunderlich Securities analyst Matthew Harrigan on Thursday started the stock with a "hold" rating, arguing it is "in transition financially and operationally."
And Goldman Sachs analyst Ingrid Chung put TWC shares on the "sell" list on Wednesday, predicting "no upside potential to our six-month price target of $25." She cited the high leverage, saying it will "lead to underinvestment in marketing and in its network, limiting TWC's ability to compete, and cause TWC to divert nearly all of its free cash flow toward bondholders rather than to shareholders."
TWC shares closed the week at $26.30, down 49.6% year-to-date when adjusting for a reverse stock split that was part of the recent spinoff, according to Yahoo Finance.