For cable TV investors, this week's challenge is to separate the unexpected disappointments from the expected ones.On Wednesday and Thursday, the nation's three largest operators of cable TV systems are slated to report earnings for the quarter ended June 30. The second quarter has typically been the slowest quarter of the year for cable operators, and this year promises to be no exception. But complicating the expected negatives of basic subscriber losses and slowing gains for advanced services are issues that can't be dismissed as seasonal: competition from satellite in the multichannel video market, and the onslaught of local telcos into the high-speed Internet-access business. Rightly or wrongly, the threat to cable posed by satellite operators and regional Bell operating companies -- both separately and in joint ventures -- has weighed heavily on cable stocks over the past six months. So, with analysts preparing for less-than-blowout quarters in the next few days, investors will have to decide how much seasonality is to blame -- and whether there's any reason to hope that the turnaround of cable stocks has arrived. Kicking off the reporting season Wednesday morning will be Comcast ( CMCSA), the nation's largest operator of cable TV systems, and Time Warner ( TWX), the multimedia conglomerate that's the operator of the second-largest group. Cox ( COX), the country's third-largest cable operator, reports Thursday morning, and Insight ( ICCI), a top 10 operator, posts its numbers Friday morning. Shares of all four companies have suffered this year amid a sustained cable-sector selloff. On Friday, Comcast closed at $27.99, Time Warner at $16.94, Cox at $27.66 and Insight at $8.60.
Looming ThreatAmong cable watchers, the dispute isn't whether or not cable faces threats threat from satellite and RBOCs. Rather, it's the magnitude and immediacy of those threats, and the degree to which investors already understand them. Yes, say cable bulls, telcos are getting an ever-increasing share of new high-speed Internet customers, but there's still plenty of growth opportunity for cable operators, and the fears of a price war are overblown.
Seven-Year ItchWhatever the challenges, cable stocks are looking inexpensive on a historical basis. American Technology Research's Rob Sanderson points out that cable stocks are at seven-year lows, based on multiples of the following year's earnings before interest, taxes, depreciation and amortization. Merrill Lynch's Jessica Reif Cohen noted earlier this month that Comcast, Cox and Cablevision ( CVC) (which reports Aug. 9) were trading at multiples of between 8 and 9 times estimated cable EBITDA for 2004. "We note that, typically, under 10x EBITDA valuation has proven to be a lucrative entry point for investors," Reif wrote. As for what could spark a turnaround, there are several theories.
|Sinking Sensation |
Cable stocks struggle in 2004
In a note last week, for example, Oppenheimer analyst Thomas Eagan wrote that second-quarter numbers should spark a turnaround in cable stocks, thanks to "solid" year-over-year financial results amid the seasonal weakness. "With heightened concern over cable operators' competition," Eagan wrote, "we believe solid results from the major cable