2015 has been rough on media companies.
It was the year that cord-cutting, or the practice of customers dumping cable TV subscriptions in favor of online streaming services like Netflix, Hulu and the like, became a game-changing phenomenon.
In August 2015, The Walt Disney Co. spooked investors when it announced that ESPN had lost subscribers and revised its cable-TV outlook downwards. One month later, Time Warner Inc. lowered its earnings outlook and the media sector started looking shaky.
For the upcoming year, cable stocks may just be the saving grace for the sector, as they shift focus to increasing their broadband market share.
We compare two of the best stocks in the space, which could have been one company last year, and tell you which one holds more promise to deliver solid returns in 2016.
Time Warner Cable (TWC)
Despite its merger with Comcast (CMCSA) - Get Report falling apart in mid-2015, TWC managed to end the year on a highly positive note. The stock gained 25.5%, and is not trading very far away from its 52-week high of $194.22.
Part of the reason is that after its deal collapsed with Comcast, Charter Communications Inc. (CHTR) - Get Report came and made a deal with Time Warner Cable. The U.S. Federal Communications Commission is currently reviewing the merger of the two rivals, which also has to receive a nod from the U.S. Department of Justice. If the deal comes through, the new merged entity would provide faster internet to customers and be the internet and cable company only second to Comcast.
Despite the turmoil in the industry, TWC has consistently raised dividends from $0.40 per quarter in 2010 to $0.75 in 2014, and has kept the number constant in 2015. Its dividend yield stands at 1.62%.
After reporting a 3.6% year-over-year (YoY) increase in revenues to 5.92 billion in the most recent quarter, and registering higher than expected high-speed data customers, Time Warner Cable is readying itself for a lucrative 2016.
The company, along with Direct TV and Dish Network, voiced plans to raise rates in 2016 and is depending on its "Gigasphere" technology to help it achieve higher internet speeds in 2016. A continuous increase in revenue in quarters ahead seems quite likely.
Nineteen analysts covering TWC have a 12-month price target of $205 for the stock, representing a 12% increase from its current price.
With $160 billion in assets and $69 billion in annual revenue, the world's biggest media company (the leader in broadband) owns Universal Studios, NBC network, four theme parks, and has partnerships all over the world. Yet, the stock failed to impress last year.
Two factors worked against Comcast in 2015, apart from the downside pressure faced by the whole industry.
The first was the setback of its proposed merger with Time Warner Cable facing rejection from the FCC. What makes it worse is the fact that rival Charter went after Time Warner Cable and if the deal materializes, the combined entity can prove to be a significant threat to Comcast.
The second is dissatisfied customers. Over the past couple of years, users increasingly complained about Comcast's complex billing systems and insufficiently trained staff.
Despite wading through troubled waters, Comcast has continued to raise its dividends consistently since 2008. However, one wonders how sustainable this would be going forward as the company's reserves will likely be squeezed as it attempts to pacify irked customers. Its dividend yield currently stands at 1.83%, not particularly attractive for a stock with a downward trend.
Despite the setbacks, Comcast's stock has kept its head above water to end the year flat, largely helped by its entertainment property Universal Pictures whose Minions, Furious 7, and Jurassic World productions crossed over $1 billion in global box office collections. Its Universal Studios theme parks also witnessed record footfalls in 2015.
With these two segments unlikely to repeat their stellar performance in every quarter in 2016, the only buoy for the company may be the broadband business. As per research from Leichtman Research Group, as of the end of third quarter of 2015, Comcast is the largest broadband cable company with 42% of broadband subscribers in U.S.
It also had 906,000 of the 2.3 million broadband subscribers added in the U.S. in the first three quarters -- the highest among all its competitors.
While Time Warner Cable may look like an easy choice, it needs to be considered that a lot of upward movement in stock price is built on the discussions of mergers. And if the deal with Charter gets delayed or cancelled, like the deal with Comcast, the stock may not have the same level of attractiveness.
On the other hand, Comcast, struggling with short term issues, is a market leader in broadband and pay TV cable. The company has strong fundamentals, consistently rising dividends, and relatively cheap valuations (17 times price-to-earnings ratio (P/E) vs. 28 times Industry P/E). With all the characteristics of a blue-chip, the stock has "buy" or "strong buy" recommendation from 23 of the 28 analysts covering the stock, with a 27% higher target median price.
Think of the long term value and buy Comcast.
As we just explained, Comcast looks like a good bet now, even during this year's extraordinary market volatility. But if a correction or terrorist attack occurs in 2016, there's a group of stocks that will hit the skids and never recover. Click here for a free report that lists the dangerous stocks you should sell immediately.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.