Cable sector takes its lumps but has upside
EmptyNEW YORK -- Cable stocks have been getting hammered amid concerns over increased competition for subscribers, with Comcast Corp.'s reduction in 2007 guidance last week adding to investor headaches.
But some analysts argue that things should look up for cable stocks soon, given how downtrodden they are.
Credit Suisse analyst Bryan Kraft argued in a report this week that "risk/reward has become favorable for cable stocks following declines in equity valuations over the past four to six months."
To be sure, he warned that "this is not a situation in which the stocks are washed out, fundamentals have bottomed, and everything just improves from here" as "cable's basic subscriber trends will worsen further before improving." Specifically, the analyst estimated that the industry's basic subscribers will decline 1.6% in 2008.
But Kraft emphasized that "the market is not giving consideration to some of the counterbalancing positive forces that will emerge in 2008 and 2009." He cited the launch of business customer services, higher broadband speeds than competitors and improving advertising revenue trends.
In his review of the recent quarterly earnings season, Miller Tabak + Co. analyst David Joyce argued even more clearly for higher cable stocks over time.
"Cable operating cash flow trading multiples are at historic lows and represent, in our opinion, a fundamentally oversold level that should give comfort to long-term investors who can start accumulating these shares," he suggested.
Historical and estimated free cash flow trends in particular "indicate increasing healthiness of the sector," Joyce said.
In a recent report, Oppenheimer & Co.'s Thomas Eagan also said there should be a silver lining for cable stocks soon.
"We expect cable's lackluster third-quarter sub growth to continue somewhat into the fourth quarter, keeping the stocks' trading multiples at current depressed levels through year-end 2007," he suggested. "That said, we believe concern with basic churn impact to valuation is overdone."
Credit Suisse analyst Kraft said his top U.S. cable stock pick is Comcast, for which he has cut his target price to $23. However, he also upgraded shares of satellite TV giant DirecTV from "neutral" to "outperform" with a $30 price target.
Eagan also has a "buy" rating on Comcast along with Time Warner Cable and sat TV firm EchoStar Communications.