As the big cable companies prepare to post second-quarter earnings, the outlook for their crucial broadband business is suddenly looking brighter.
Over the past few days, the major regional Bell operating companies -- ranging from
-- have reported slower-than-expected growth in high-speed Internet connections.
That's good news for big cable companies such as
. After all, the Bells' digital subscriber line, or DSL, business is seen as the primary threat to cable's domination of the lucrative high-speed data business. And any slowdown on the part of the RBOCs stands to be made up by their cable rivals.
Any good news certainly will be music to investors' ears. Cable stocks have slid this year amid worries about competitive threats and the pace of cash-flow growth.
On Tuesday, Comcast's shares rose 49 cents to $28.60, Time Warner's rose 24 cents to $16.89, and Cox's rose 78 cents to $28.68.
"Concern over competition impacting cable operators has undeservedly escalated," Oppenheimer analyst Thomas Eagan wrote Tuesday, in one report highlighting the slowdown in DSL growth. "Contrary to the market's concern that DSL will garner a higher 2Q share of the net adds than cable, we currently estimate that cable share will now exceed (albeit just slightly) DSL's."
Comcast, the nation's largest operator of cable systems, is slated to report second-quarter results Wednesday morning, along with Time Warner, parent of the second-largest operator. Cox, the No. 3 cabler, is due to report Thursday morning. (See table below for financial and operational expectations.)
In a Tuesday note, Banc of America's Doug Shapiro notes that SBC reported net DSL additions of 315,000 for the second quarter, short of the consensus expectation of 420,000.
added 120,000, short of expectations of 150,000, and Verizon gained 280,000, coming up 40,000 short.
That collective performance by the RBOCs, says Shapiro, is a positive for cable stocks -- along with other recent developments such as increasing speculation about major stock buybacks. "The important implication is that there is unlikely to be much additional share shift in broadband net adds this quarter between the Bells and cable," writes Shapiro.
Fulcrum Global Partners' Richard Greenfield observes there are two possible conclusions from the DSL slowdown. One is that, despite cable's higher pricing for high-speed Internet connections, its higher bandwidth and bundled offerings mean a smaller seasonal slowdown for cable -- "a meaningful near-term positive for the cable stocks."
The other possibility, however, is that cable industry estimates are too aggressive, writes Greenfield, and seasonality in broadband Internet connections "is higher than we have modeled."
Greenfield says that if the sequential decline in cable modem additions matches that of the 24% decline in DSL additions from the first quarter, it would be a negative for cable operators. Going into earnings season, he expects second quarter cable modem additions for Comcast, Time Warner Cable and Cox to be down 15% from first-quarter adds.