Program varies on cable sector

High times ahead for giants like TWC; tough days for small firms

It's a tale of two ends of the cable spectrum.

Investors have shown a continued appetite for most publicly traded cable stocks during the first weeks of the new year despite a strong run by all sector stocks in 2006.

Indeed, many on Wall Street predict that this will be another good year for the big blue-chip cable players, including Time Warner Cable, whose shares are expected to officially start trading in the coming weeks. All that even though big cable stocks already trade close to their 52-week highs.

At the same time, however, shares of small cable operator Mediacom Communications have faced headwinds on the Street amid concerns that it doesn't have enough leverage to emerge unscathed from a nasty carriage dispute with broadcaster Sinclair.

Pali Research analyst Richard Greenfield recently downgraded Mediacom shares to a rare "sell" rating with a research note titled "It's Tough to Be Small."

He said that "despite the across-the-board strength exhibited by the cable industry throughout 2006, we are increasingly concerned about Mediacom's prospects." Greenfield not only cited the showdown with Sinclair as a concern but also the potential for a slowdown in financial growth this year.

"The company's ability to convert deeply discounted subscribers into full-paying subscribers during mid- to late 2007 is a meaningful risk to our 2007 (financial) estimates," he said.

Mediacom's revenue growth could decelerate from an estimated 9.7% in 2006 to 9.3% this year, Greenfield said. Operating cash flow gains could falter from 9.1% to 7.5%, he added.

Overall, Greenfield said that Mediacom deserves only a $6.50 target price.

Mediacom's stock gained 46.4% last year to $8.04 and so far has held up well this year despite the Sinclair showdown. It is down 0.9% year-to-date.

Meanwhile, Comcast Corp. has earned a slew of bullish analyst notes since the start of the year, with many analysts boosting their financial forecasts and price targets.

For example, Merrill Lynch analyst Jessica Reif Cohen boosted her Comcast price target by $10 to $57 (HR 1/16), and Goldman Sachs analyst Anthony Noto in starting coverage of Comcast called it his "favorite idea" in the distribution sector. The stock is up 5.2% so far this year.

TWC, whose shares have been trading on a when-issued basis ahead of their impending official market debut, also has looked healthy.

"We anticipate cable multiples to be the same or higher in 12 months," Reif Cohen said in a recent note that projected TWC 2007-10 operating cash flow growth would hit a compound annual growth rate of 14%.

Another big cable firm getting some Street buzz despite strength last year is Charter Communications. Citigroup analyst Jason Bazinet recently boosted his target price from $3.25 to $4.35 and reiterated a "buy" rating on Charter, citing improving fundamentals.

"Our bullish stance stems from our belief that rural cable will outperform urban cable due to lower telco fiber risk and faster growth from voice deployments," he wrote.

Overall, cable stocks, especially bigger blue chips, still look appealing as the year unfolds, many said.

Cablevision Systems, meanwhile, seems to be an exception in the cable space right now as it has left Street observers clearly divided since a special committee of the company's board last week rejected a $30-per-share bid by the founding Dolan family, headed by chairman Charles Dolan, to take it private.

Analysts said the shares' value should be as high as $36, and others speculated about a potential third-party bid for at least parts of Cablevision. Wachovia upgraded the stock from "market perform" to "outperform," citing the generally expanding cable stock valuations and "strong" fundamentals at Cablevision.

However, Cablevision shares fell 1.4% to $30.23 on Monday after Bazinet downgraded the stock from "hold" to "sell." He argued that shares are propped up by assumptions of a takeover but that no further takeover bid is likely. Bazinet believes that the stock could fall 20% if nobody buys the cable TV operator. He also warned against the "looming" risk of growing competition from Verizon's FiOS video service.

Cablevision shares had hit a high last week after the Dolans' bid was rejected. Even though the family said theirs was the "best and final offer," Cablevision's stock began selling for more than $30 last week.
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