Cable Stocks Weather Street’s Storm

Op Suffer Mostly Collateral Damage During Stock Market’s Worst Week Since Sept. 11 Attacks

By Mike Farrell -- Multichannel News, 9/20/2008 6:23:00 AM

In a week that could have been the subject of one of its popular dangerous-job shows — call it “Deadliest Week in the Stock Market” — Discovery Communications made its long-awaited debut on the NASDAQ stock exchange and promptly fell more than 25%.

But Discovery, like its other publicly traded cable brethren, was largely a victim of the Dow Jones Industrial Average falling a collective 394 points during the first part of the week.

Cable stocks in general were down about 6% between Sept. 15 and Sept. 19, but it was far from the bloodbath that other sectors — like financial services — endured. And most of those losses were tied to Cablevision Systems — which fell 7.6% during the week, mainly over fears that the decimated credit markets would prevent the cable operator from selling its programming assets. If Cablevision is taken out of the mix, cable operator stocks decline just 5.4% during the period.

Discovery is being traded under three symbols for now — DISAD, DISBD and DISCK — with DISAD (its Class A common shares) being the most widely traded. The tickers will revert back to DISCA and DISCB (formerly the symbols for Discovery Holding) in about 20 trading days.

Discovery Class A shares got pummeled on their debut — they opened at $18.53 per share and closed at $13.81, down 25.5% or $4.72 — while the non-voting Class C DISCK shares soared 25% from $12.80 to $16. According to a research report from Merrill Lynch media analyst Jessica Reif Cohen, the disparity could be explained simply: Late in the day, the DISCK shares were added to the Russell 1000 index and investors started selling the class-A shares and replacing them with DISCK shares. The DISBD shares were unchanged at $18.96 each.

That balance tipped the other way last Friday, as the DISAD shares closed up $3.48 each (25. 2%) to $17.29 in afternoon trading, while the DISCK shares finished the day at $16.70 each, up about 70 cents per share.

Analysts are largely bullish on Discovery — it remains Reif Cohen's favorite among the pure-play cable-network stocks because, in her view, it has stronger operating trends than Viacom and a less expensive valuation than Scripps Networks Interactive.

Cable shares appeared to weather the initial storm — the sector was down only slightly on Sept. 15 — the day that Lehman Bros. announced it would file for bankruptcy, sending the credit markets into turmoil and the Dow down 504 points, its biggest single-day drop since the Sept. 11, 2001 terrorist attacks in New York.

Cablevision was hit hardest on that day — the stock fell 12% ($3.67 per share to $26.11 on Sept. 15), mainly because investors believed that a weak credit market would hurt the possible sale of its programming assets.

For other cable stocks, it was a day unlike many others — Time Warner Cable was down 66 cents (2.4%) to $26.77 each; Charter Communications dipped 9 cents (8.8%) to close at 93 cents each; Comcast fell 85 cents (3.9%) to $20.86 per share and Mediacom Communications was down 67 cents (8.6%) to $7.11 per share.

Satellite-TV stocks fared about the same — Dish Network was down $1.39 each (4.9%) to $26.73 and DirecTV Group dipped $1.29 per share (4.7%) to $26.30 each.

The market maneuvers finally caught up with the cable sector on Sept. 17, when the announcement that the government would bail out insurance giant AIG to the tune of $85 billion translated into a nearly 450-point drop in the Dow. Both cable and satellite stocks dropped suddenly.

The markets clawed back on Sept. 18 — the Dow rose 410 points and took cable stocks along with it — all but Cablevision (down 49 cents) showed a gain. The optimism continued last Friday, as the Dow closed up 368 points. All of the major MSO stocks showed a gain: Time Warner Cable rose 44 cents to $25.78; Comcast was up 27 cents to $20.71; Cablevision rose $2.14 to $27.53; Mediacom gained 42 cents to $7.35 per share; and Charter rose 4 cents to 98 cents per share.

Cable companies are still more likely to be affected by fundamentals than by market turmoil. Indeed, some recent changes made by the federal government to bolster the credit markets could have a positive impact on cable deals, which have been a big driver of the stocks over the years. “We're back on a path toward normal deal activity,” Joyce said. “We're not there yet, but we've bottomed and we're heading back in that direction.”

Miller Tabak analyst David Joyce said that while cable stocks haven't returned fully to the pre-Sept. 15 levels, many have managed to gain back more than half of their losses already. But that doesn't mean that media stocks are out of the woods yet, he added. The sector has been down this year because of fears of competition and the economy, issues that still loom.

“The correction from this week's drop doesn't mean that the economic situation has changed for the consumer overnight,” Joyce said. “There has just been a correction and a stabilization of the financial-services industry, but it doesn't mean that advertisers are going to be rushing back in to the broadcasters and that everybody is going to be flush with cash in their wallets and they will all start taking the triple play. It's more of a correction to the fearful rushing to the exits.”