With sector stocks as low as they can go, pay TV could be exactly that for investors

There's opportunity in the crushed prices of some pay TV stocks. According to a research note this week, shares of DirecTV, Time Warner Cable and others have been pummeled worse than they should have been despite a recession.

"Economic resilience, rational competition, predictable free-cash-flow growth and attractive valuations make the sector an attractive investment," Banc of America analyst Bryan Kraft writes.

Kraft's thesis takes into account that earnings estimates are plummeting across the board for companies in all industries but that the revisions for the S&P 500 will be more significant than for the pay TV industry.

So the cable and satellite sector having "corrected" to the same degree as the S&P 500 thus far is "not a great example of market efficiency."

Indeed, others have been noting for weeks that Wall Street's sell-off is owed to factors beyond falling revenue or profit at publicly traded businesses. There's also good old-fashioned fear, tax-loss selling and margin calls that have forced people to be sellers at prices at which they might otherwise prefer to be buyers.

Taking all this into account, when the "real earnings numbers" are out for cable and satellite companies, the stocks could react favorably.

They might at that, considering there's not much further some of them can fall. Charter Communications, for example, is off 86% to just 17 cents this year, while Dish Network is down 69% to $10.60.

Kraft calls DirecTV and Time Warner Cable his top picks in the sector, while Charter is his least favorite.

"Given the credit market conditions, we would stick to owning the companies with the better balance sheets," he says, also putting into that category Dish, Comcast and Liberty Entertainment.

Kraft breaks down his analysis into three segments: Internet access, multichannel and voice.

For voice, he says the cable companies still will take share from the telcos but that the pie is shrinking because of the accelerating trend of households dumping their fixed-line phones in favor of going wireless.

As for Internet access, expect growth to slow significantly as it already is a mature product category. Kraft figures that there are 39.6 million cable broadband subscribers in the U.S., growing to 49.3 million in 2012. That's faster growth than the telco broadband subscribers, which will grow from 32.7 million now to 40.4 million in the same time frame.

"We are forecasting cable to capture 55%-60% share of fixed-line broadband net additions through 2012," the report says.

For the record, dial-up Internet users will fall from 11.5 million now to 2.2 million in 2012.

The good news for broadband providers is that Kraft sees them able to raise prices in the next two to three years and increase average revenue per user in other ways, including charging for home networking services and tech support.

As for pay TV, Kraft sees the overall unemployment rate in the U.S. rising in 2009 while household growth stagnates, both of which are negative undercurrents for the industry. But he sees the positive impact from the digital broadcast transition more than offsetting those negatives.

Multichannel industry growth, which was running at 2% from 2004-06, slowed to 1.8% in 2007 and just 1.3% in the first nine months of this year. Kraft, though, sees it spiking to 3.1% next year as the digital broadcast transition pushes some over-the-air customers to become pay TV subscribers.

Kraft says that cable enjoys a 64% market share of pay TV, with satellite at 31% and 2% for the telcos. As telcos grow their subscriber ranks from 2.9 million this year to 9.4 million in 2012, cable will shrink from 64.1 million to 63.1 million and satellite will grow — more courtesy of DirecTV than Dish — from 31.3 million to 33.6 million.

Although he's bullish on the industry because stocks have fallen so hard, Kraft still sees some trouble ahead for pay TV as cable, satellite and telcos spend more to woo customers.

"The slower-growth macroeconomic environment we are in is pushing the competitors to be more aggressive with marketing and promotions as they fight over fewer net additions," he says.

Boil this all down, and he sees shares of DirecTV rising 47% to $30 a share in the next 12 months as shares of Time Warner Cable rise 37% to $28.

Paul Bond can be reached at