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After a bad 2007 for most cable stocks, some on Wall Street are getting more bullish on select sector stocks in the new year.
In a case of good timing, Comcast chairman and CEO Brian Roberts on Tuesday became the first-ever cable CEO to give a Consumer Electronics Show keynote address. His bullish tone could well serve as one catalyst for at least his own company’s stock early in the year, some said.
While investors have stayed away from cable, Bear Stearns analyst Spencer Wang started the week by reiterating a “positive view on the cable industry, in the context of our market weight rating on the U.S. cable/satellite TV sector.”
“In 2007, cable stocks weathered a perfect storm, including rising (capital expenditures), slowing growth, increased competition from telco video, fears of a large wireless investment, and, to a lesser extent, regulatory risks,” he said.
But at the start of 2008, “we view risk-reward as attractive with expectations becoming increasingly low,” Wang added. “Even with (telecom companies’) rolling out video, our work suggests annual basic-subscriber losses should be confined to 1%-2.5% per year, while our analysis of telco video return characteristics suggest that pricing should remain disciplined.”
To reflect increased competition and potential macroeconomic risks amid talk of a possible U.S. recession, Wang lowered his long-term cable forecasts to what he called “a low bar.” He now projects a five-year compound annual growth rate of 6.6% for revenue and 8.3% for operating cash flow for Comcast and Time Warner Cable — below the double-digit gains often seen in recent years.
“The silver lining of slower growth should be reduced (capital expenditures),” he said.
He suggested that there now is stock upside despite the lower financial estimates. “Our new price objectives of $25 for Comcast and $39 for TW Cable imply significant upside opportunity,” Wang added.
He acknowledged that his more bullish call comes at a time when many on the Street are still careful about cable stocks and their outlook. The call “may be early given a lack of near-term catalysts,” Wang said. “We believe investing in cable equities at current levels offers attractive risk/reward for long-term oriented investors.”
Miller Tabak + Co. analyst David Joyce also recently outlined a somewhat more bullish take on at least the largest U.S. cable company, upgrading his rating on Comcast shares from “neutral” to “buy” based on valuation after the stock’s recent declines.
Joyce sees the firm’s price tag hitting $17-$21 near term, $24 over the midterm and $30 over the longer-term.
He argued that the stock “will be in a show-me period for some time — execution in the face of competition will be key.”
Beyond Tuesday’s CES keynote that outlined new initiatives, Joyce believes there could be more stock drivers ahead.
“When Comcast reports earnings (next month), initial 2008 guidance should be announced that could also quell fears,” he said.
Pali Research analyst Richard Greenfield said shares of Mediacom Communications also could be in for a run-up after big losses in 2007.
He started the year by upgrading the stock from “sell” to “neutral” as it has fallen 35% since his last downgrade in October and “is currently 17% below our original $5.50 price target.”
While Greenfield warned that the firm will “continue to struggle with churn related to the Big Ten Network battle, we feel the greatest damage (subscriber losses) has been done.”
Mediacom shares have been showing upward momentum in recent days.
While cable seems to be starting the year with some positive buzz, AT&T chairman and CEO Randall Stephenson on Tuesday also tried to woo investors with an update on the progress of his firm’s U-verse video service that has emerged as a competitor to cable and satellite TV, though not as aggressively as Verizon’s FiOS.
Speaking at Citi’s annual Entertainment, Media and Telecommunications Conference in Phoenix, Stephenson said he feels AT&T’s execution so far is “good,” which should ensure solid growth for the next several years.
For this year, he predicted “fairly stable pricing” for the video service. The first 10% of market share in many regions is reachable simply by providing an alternative to cable, no matter what the pricing level is, he argued. Growth beyond that will require more focus on marketing, Stephenson said.
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