Cable Stocks Rise Again

Strong Financials, Deal Market Drive MSO Sector

By Mike Farrell -- Multichannel News, 7/12/2010 12:01:00 AM

Cable stocks, coming off a big rally last year, were on the rise again in the first half of 2010, driven by a mixture of strong financial performance, the promise of shareholder returns and a little bit of good news.

Collectively, MSO stocks rose about 17.8% between Jan. 4 and June 30, slightly behind the nearly 19% rise for the sector in the first half of 2009. That could be a good sign for things to come, as the sector finished up by more than 40% in 2009.

Miller Tabak media analyst David Joyce said the reasons for the gains were simple: Strong first-quarter financial performance, healthy gains in new services and an increased focus on returning value to shareholders.

Leading the charge was Mediacom Communications, which saw shares rise 47% ($2.14 each) to $6.72 in the first six months of the year, fueled mainly by chairman and CEO Rocco Commisso’s proposal to take it private at $6 per share. The remaining cable-operator stocks rose less dramatically. Time Warner Cable rose 24% ($10.03 each) during the first half of the year to $52.08, bolstered by strong new-services growth in the first quarter and a January announcement that it would issue a $1.60-pershare annual dividend. That announcement increased the number of dividend-paying MSOs to three (Comcast and Cablevision Systems are the others), and according to Joyce, attracted new investors to the sector.

Stronger than expected first-quarter growth — 399,000 high-speed data additions marked its highest quarterly gain since 2008 — helped drive Comcast’s shares up 4% (62 cents) in the period to $17.37. At Cablevision, which also had a strong first quarter, (highspeed- data customers increased by nearly 43,000), the stock rose nearly 11% ($2.35 each) to $24.01 during the first half.

MSOs also helped themselves by striking deals that refl ected the inherent value of cable assets. Cablevision’s agreement to purchase Bresnan Communications (slated to close year-end) was a prime example.

The $1.4 billion deal valued Bresnan’s 320,000 customers in Montana, Wyoming, Utah and Colorado at about 8.3 times cash flow. That is substantially higher than the 5.5 to 6.5 times valuations for public cable operators.

While Joyce agrees that cable is undervalued, he said did not expect public multiples to rise as a result. “The problem is the general market is still too nervous,” Joyce said. “That’s going to keep a lid on multiple expansion.”

By contrast, satellite stocks were affected by an increasingly tense competitive environment and slower growth. That showed in the stocks’ performance — Dish Network declined 13.2% in the first half of the year while DirecTV was relatively flat, up just 0.3% for the period.

On the programming front, easier comparisons to last year’s dismal advertising market and new revenue streams like retransmission consent provided a boost. As a whole, programming stocks were up 11.4% during the period, about one-quarter of their pace last year (45%). Four of the nine stocks in the sector were down in the period and one stock in particular — Liberty Capital, up 74% in the period — seemed to drive most of the gains.

Joyce said that programming stocks were riding on improved advertising results and a promising upfront. Overall, the upfront market is expected to be up by more than 20% for the next season for broadcast and cable.

“The notion is that we’ve probably seen the worst, so dividend increases and stock buybacks could become a reality again,” Joyce said.