Cable Operators

Cable Stocks Rise Again

7/12/2010 1:01 PM Eastern

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.

March