Although cable stocks have climbed out of the gutter over the past few months, the climate doesn't look any different from their new vantage point.

Following the close of the third-quarter earnings season -- and Monday night's completion of the merger between

Comcast

(CMCSK)

and

AT&T's

(T) - Get Report

AT&T Broadband -- shares in cable stocks are up more than 50% from their low-water mark in August.

But the prospect of a continuing rise in cable stocks, and even the sustainability of the recent rally, is threatened by many of the same challenges that faced the industry before the quarter's numbers started rolling in: declining numbers of basic cable subscribers, a maturing advanced video business and company-specific issues, such as Comcast's need to clean up operations at the former AT&T Broadband.

While growth in the high-speed Internet connection business continues to be a bright spot, the impact on the economy that these and other advanced services have creates a significant unknown for the industry in 2003, says one cable analyst.

Bagging It

Summing up the third quarter, J.P. Morgan cable analyst Jason Bazinet called it a mixed bag. On the one hand, the eight major cable operators, other than

Charter Communications

(CHTR) - Get Report

, reported "solid" revenue growth and better-than-expected growth in earnings before interest, taxes, depreciation and amortization -- a common media industry bottom-line yardstick. On a consolidated basis, Bazinet calculates in a report issued Monday, revenue grew 11% over the third quarter of 2001 and EBITDA grew nearly 15%.

But, pointed out Bazinet, the video business continues to weaken.

In the third quarter, which has traditionally been a strong one for adding subscribers, cable operators saw their basic subscriber counts decline by 184,000 from the end of the second quarter. That made the Sept. 30 quarter the third straight in which operators have lost basic subscribers, with only

Cox

(COX)

,

Mediacom

(MCCC)

and

AOL Time Warner

(AOL)

adding subscribers. (Comcast and

Insight

(ICCI)

fell just short of break-even.)

Digital video customers -- receiving additional channels delivered via digital video signals -- grew faster than expected, said Bazinet, though the additions fell short of households added in the third quarter of 2001. Both Cox and Charter said they would pull back on digital video marketing to concentrate on other advanced services.

And those other areas were where the real strength was. Telephony grew strongly at the few operators who offer it. But the biggest success story was in Internet service. Bazinet calculates the industry added a million new data customers in the quarter, up from 645,000 additions one year ago.

Second Time Around

But how the data business will fare in 2003 remains a major question, writes Credit Suisse First Boston analyst Lara Warner in a weekend note. Starting out with the observation that cable stocks are up 57% since August, Warner warns that even though cable is better able to weather economic adversity than other media industries, cable stock prices may be just as vulnerable this time around.

The upsurge in cable stocks, says Warner, is likely due to sector rotation -- investors moving from advertising-driven media stocks into the subscription-driven cable business, under the presumption that cable is a more defensive play in a weak economy.

Though cable's minimal advertising exposure makes it defensive, says Warner, the risks of buying cable as a defensive move are greater than they have been historically, for a number of reasons. For one, she says, the "economic resilience" of high-speed data and digital video is untested at current penetration levels. In addition, she says, competition in the video market from direct broadcast satellite services is greater than it has been in the past.

Meanwhile, one final set of wild cards for the industry stems from the now-merged Comcast and AT&T Broadband, to be known henceforth as "Comcast" rather than "AT&T Comcast," as expected nearly all the way through the merger process. While Comcast has proven adept at integrating all of its past acquisitions -- enjoying a reputation like that once enjoyed by

Cisco

-- the struggling AT&T Broadband, the biggest cable operator in the nation even before the Comcast deal, will prove quite a mouthful.

In addition, analysts have been saying for months that the new Comcast shares to be issued as part of the deal -- shares that could very well be sold off by the widows-and-orphans AT&T crowd -- will pressure not only Comcast's stock, but also the stock of all the other operators in the business.