The following commentary is from an investment professional with Clear Harbor Asset Management who is a participant in TheStreet's expert contributor program.
NEW YORK (
) -- Cable stocks are often overlooked for a variety of reasons. For one thing, people tend to associate their cable provider with rising prices and bad customer service, and no one likes to get their monthly cable bill. Moreover, cable technology -- the big, ugly set top boxes, the annoying remote controls and the antiquated user interfaces -- is like a wet blanket in comparison to the warm and fuzzy feeling we get when using
gadgets or Web sites like
And what about cord-cutting -- the possibility that we could drop cable TV altogether and use online video sources for our information and entertainment needs? This threat has weighed on cable stocks and garnered widespread attention, but so far, it only seems to be happening on the margins -- particularly among young technophiles and penny-pinching types who don't watch sports.
Last week, I referred to
cable's wire-line broadband business as its "ace in the hole," because even if consumers begin dropping video service en masse, it's highly likely that they'll continue to pay their local cable provider for broadband service. Good luck streaming online video and downloading rich media files without a high-speed wire-line broadband connection -- it's not very much fun.
If we're going to continue shelling out to cable companies every month, it makes sense to consider investing in them as well. From a user standpoint, they have some issues, but from an investor standpoint, these companies are extremely reliable cash flow juggernauts. They've held up nicely through recessions and competitive threats, and when the U.S. housing market finally bottoms and returns to growth, cable companies are poised to benefit.
My personal favorite
is Time Warner Cable
, mainly because it has no controlling shareholder and it owns cable systems in the all-important New York City and Los Angeles media markets. While the name "Time Warner" is often associated with the disastrous media merger with AOL at the height of the tech bubble, Time Warner Cable is actually a spin-off from the
media empire. It's really a pure-play telecommunications, infrastructure business. It has a manageable debt load and its management has displayed a credible commitment to delivering for shareholders: consistently raising its dividend, which now yields 2.6%.
Time Warner Cable also stands to benefit from
) landmark acquisition of media conglomerate NBC Universal without shouldering the financial risks from such a deal. That acquisition gives Comcast, the nation's largest cable provider, a strong hand in trying to steer the digital media revolution in favor of its lucrative business model, which could indirectly benefit the entire industry.
Cable companies are regional -- they don't compete with each other. To the contrary, they seem to work as a team in many ways. Comcast's NBCU acquisition - -which faced public opposition fueled by a general distaste for big media consolidation -- coupled with the Obama Administration's retreat from an attempt to impose heavier regulation on broadband networks, demonstrated the industry's clout in Washington D.C.
Even if that heavier regulation is ultimately imposed, cable's monopolistic dominance in the market for wire-line broadband service looks built to last, and wire-line broadband access is increasingly essential for consumers, businesses and institutions of all kinds in the digital economy. Wireless Internet access is a long way from being a credible substitute to wire-line service -- particularly as growth in richer online media experiences gobble up more network bandwidth -- and cable companies have rolled out free Wi-Fi access to wire-line subscribers in many markets.
On the video side, cable companies are losing customers to rising competition from
and some cord-cutting -- particularly among lower-income customers. Meanwhile, their programming costs are rising as the stagnation in traditional advertising markets leaves the media industry thirsting for more affiliate or subscription revenue from pay-TV providers. But cable companies have also succeeded in wringing higher profits from their more prosperous customers, who seem content to stick with their triple-play cable service despite rising prices. Time Warner Cable reported a 2.3% increase in gross profit per video subscriber in the fourth quarter, even as it lost 129,000 video subscribers. Its overall operating margins rose, and it showed healthy revenue, earnings and cash flow growth for the quarter and the year.
While pay-TV growth has run its course in the U.S., cable's broadband business is growing, and it's more profitable than pay-TV. Meanwhile, as media consumption continues to shift to the Internet, cable companies can shift their business model to consumption-based pricing of broadband access -- a trend that we've already seen in the wireless business. That shift could alleviate any financial pain that cable companies feel on the video side.
If the economic recovery continues, cable companies should flourish. If the U.S. slips back into recession, cable companies offer relative safety, as consumers have displayed a willingness to continue paying their cable bills, even as they cut back on other expenditures and tighten their belt. Meanwhile, if the rise of online video should start to disrupt the traditional pay-TV business more substantially, cable companies have their ace in the hole -- the wire-line broadband service of choice for American households.
Disclosure: Worden, and/or his firm, have positions in TWC, GOOG, AAPL, AMZN and VZ. They do not hold positions in the other names mentioned in this article.