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NEW YORK – Stocks of pay TV operators have fallen so much in recent weeks amid stock market turmoil and weak second-quarter subscriber results that they are oversold and should have upside, Barclays Capital analyst James Ratcliffe said Tuesday.
“We view the cable/satellite sector’s weakness on second-quarter results as unjustified as year-over-year pay TV subscriber growth was driven by a sharp year-over-year drop in growth in the addressable market (occupied homes), not a decline in the willingness of households to purchase pay TV,” he argued in a report.
He also highlighted that amid the current fears of a U.S. relapse into recession investors should like pay TV stocks as their business has
traditionally been seen as holding up better during an economic downturn. “Cable and [satellite] names have materially underperformed the market during the current selloff, even though, if concerns are about a double-dip recession, the businesses are recession-resistant,” Ratcliffe said.
His conclusion: “We view the sector as inexpensive and highlight Cablevision Systems, DirecTV and Liberty Global as our top picks.” The analyst rates all those stocks “overweight.”
Ratcliffe’s take on the drivers behind what is expected to be the largest pay TV subscriber decline ever in the second quarter was echoed on Tuesday by UBS analyst John Hodulik who wrote in a report that “the lackluster housing market continues to be the main reason for the weakness in video adds.” He estimated the pay TV industry lost 436,000 video subscribers in the second quarter, “more than twice the 204,000 lost a year ago,” but also said that “broadband makes up for weakening video.”
The two analysts’ take is different from that of Sanford C. Bernstein’s Craig Moffett. “Rising prices for pay TV, coupled with growing availability of lower cost alternatives, add to a toxic mix at a time when disposable income isn’t growing,” he had said in a report last week.
Either way, shares of various cable and satellite TV operators are down sharply since mid-year with much of the decline happening in recent weeks. Comcast shares closed Tuesday at $21.22. That is down 3.4 percent from their 2010 closing price of $21.97 after they had ended the first half of 2011 at $25.34.
Time Warner Cable shares finished Tuesday at $64.25, down 2.7 percent from the $66.03 on which they had ended last year and down from their June 30 close of $78.04. And Cablevision Systems ended the day at $18.73, down 20 percent from the stock¹s 2010 close and from its $25.34 mid-year mark.
Satellite TV stocks have seen similar trends in recent weeks, but they remain up for the year-to-date period. DirecTV’s Tuesday closing price of $43.93 was down 13.6 percent from the $50.82 mid-year mark, but up 10 percent year-to-date. Dish Network’s stock has fallen 23.4 percent from $30.67 on June 30 to $23.48 on Tuesday, but that is up 19.4 percent year-to-date.
In comparison, the broad-based S&P 500 stock index is down 5.2 percent year-to-date and 9.7 percent since mid-year.
Among TV distributors, Ratcliffe said Cablevision’s stock provides the “best leverage to a market turn,” has a “compelling valuation” and has aggressively returned money to shareholders. DirecTV is the sector¹s “best defensive name,” while Liberty Global provides international exposure and the “best organic growth,” he added.
There is also “sizable upside” at Time Warner Cable and Comcast compared to the market, but Dish, even though the stock appears cheap, “carries strategic uncertainty,” the analyst said.
Hodulik, meanwhile, has “buy” ratings on DirecTV, Comcast and TW Cable, while Moffett has similar “outperform” ratings on the latter two.
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