Cable TV stock prices have fallen to five-year lows, by one calculation.
But though cable investors are expecting conditions to improve, analysts aren't expecting spectacular evidence of a turnaround when a pair of major operators report fourth-quarter results this week.
earnings slated for Tuesday morning and
scheduled for Wednesday morning, Wall Street will have to settle for important yet likely inconclusive information about some of the major variables driving the cable business and its stocks: programming costs, as well as the three Ds of the cable business: digital, data and direct broadcast satellite competition.
Though most cable stocks have bounced off their lows of last summer -- when fears peaked that cable operators wouldn't be able to dig their way out of massive debt and capex spending -- cable stocks remain under pressure. As Banc of America Securities analyst Doug Shapiro points out, the ratio of enterprise value -- market cap plus debt, minus cash -- to earnings before interest, taxes, depreciation and amortization for large-cap cable stocks is right where it was from 1990 to 1997. EV/EBITDA, that is, is now in the range of 8 times to 10 times, well below the high-teens ratios they enjoyed from 1997 to 2002. Relative to the
, Shapiro argues that the stocks are at a 12-year low on this basis.
But concerns about slow-growing or shrinking subscriber counts weigh on the stocks, as do newer worries about
faster-than-expected increases in programming costs. In this atmosphere, analysts are expecting modestly optimistic reports from the sector, rather than barn-burning numbers.
First, some broad expectations for the fourth quarter of 2002. Cablevision, which comprises New York metropolitan area cable operations on the one hand, and programming and other businesses on the other, is expected to show revenue growth for its cable systems of 7% to 9%, and growth upwards of 15% for earnings before interest, taxes, depreciation and amortization. Cox, meanwhile, is expected to show revenue growth and EBITDA growth in the low double digits, according to
informal survey of analysts' reports.
Within those results, basic cable growth -- gnawed at by DBS -- is expected to be weak, high-speed data strong, and advanced digital video tiers throwing off mixed signals.
When Cablevision reports, for example, Salomon Smith Barney's Niraj Gupta expects news of 5,000 basic subscribers lost in the fourth quarter, bringing the total subscriber count down to 2.96 million; a total of 175,000 digital video subscribers; and 748,000 high-speed Internet subscribers. Gupta recently raised his estimates for Cablevision, which he rates a buy; his firm has received money for investment banking services from Cablevision in the past 12 months, and owns more than 1% of a class of the company's stock.
In contrast to Cablevision, Cox has already issued guidance for 2003, telling analysts that both revenue growth and EBITDA growth will be in the 14%-15% range, basic subscribers will grow 1% and the company will show positive free cash flow -- that is, cash flow from operations after capex and interest expense have been subtracted -- for full year 2003.
For the fourth quarter, Credit Suisse First Boston's Lara Warner is expecting 25,000 net additions for basic subscribers, 132,000 high-speed data additions, 85,000 digital video subscriber additions -- like the third quarter, well off the pace of year-before growth -- and 67,000 net new telephony customers.