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Cox Communications Rallies as Cost Worries Appear to Ease

An analyst report pushes the stock 4% higher, in the wake of a recent 25% selloff.

Like a Phoenix rising from the ashes, Cox Communications (COX) jumped 4% Monday as the cost worries that led to last quarter's earnings shortfall showed signs of abating.

Monday's balm was an upgrade to a near-term buy from accumulate by influential

Merrill Lynch

media analyst Jessica Reif-Cohen, two months after she downgraded the company because it failed to hit its numbers in the second quarter. That was mostly as a result of a fierce -- and expensive -- battle in the Phoenix market the Atlanta-based cable operator is having with

Qwest Communications

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(Q)

for customers. The downgrade punished Cox shares, knocking 25% off their value and shaving $6.5 billion off the company's market cap.

Qwest is "overbuilding" in Phoenix to develop technology that would allow the company to bundle several services over a telephone line. Those services, including Internet access, telephony and cable access, are the same services cable operators such as Cox have been furiously upgrading their cable lines to deliver in a single package.

Reif-Cohen, in a report she put out Monday afternoon, said it appears that Quest's technology is very expensive, and that Qwest appears to have halted expansion plans in the area. (Qwest didn't immediately return a call seeking comment.) While Qwest has apparently made some inroads because it has targeted areas in which Cox didn't yet offer upgraded service, "we believe that Cox will regain its lost market share and is already increasing its subscriber base in Phoenix," Reif-Cohen wrote.

She noted that she expected Cox stock to "tread water" instead of taking a precipitous fall after it announced disappointing earnings on July 27, which is why she downgraded Cox. The free fall makes the stock an attractive bet at its current levels, Reif-Cohen wrote.

Cox closed up $1.94, or 4%, at $34.69 Monday. Merrill Lynch has done some underwriting for the company in the last three years, according to a footnote in Reif-Cohen's report.