Cable Operators

Distribution Trumps Content in First Quarter

6/06/2011 12:01 AM Eastern

Content may be king, but with a few notable
exceptions it wasn’t quite as attractive as distribution,
which dominated the “buy” column for several of the media
mutual funds in the fi rst quarter.

The trend appeared to gain steam
from the fourth quarter, when many
of the top media mutual funds added
to their distribution portfolios. And
like the previous period, top buys in
the first quarter included Comcast,
DirecTV and telcos AT&T and Verizon
Communications. On the selling
side, the funds reduced their positions
in content stalwarts like News
Corp., Viacom and Time Warner Inc.

While none of the funds would
comment on their individual investment
activities, analysts believe that a
strong fourth quarter, where cable operators
— and Comcast in particular
— reported better-than-expected results,
may have encouraged buying in
the months after results were released.

First-quarter results for the cable
operators built on the strong momentum
of the prior period. At Comcast,
basic subscriber losses were less than
half of those a year ago. Satellite-TV
giant DirecTV also continued its
strong growth trajectory — it gained
about 663,000 net new customers in
2010, by adding another 184,000 subscribers
to the rolls.

HEAD-TURNING RESULTS

Miller Tabak media analyst David
Joyce said distribution became more
attractive for two reasons: improved
operational performance and a rise
in the prices of content stocks. Prior
to the fourth quarter, distributors
had weathered two quarters of subpar
performance. When results started
to improve, and content stocks
got more expensive, it turned some
fund managers’ heads.

“Distributors got relatively cheap
compared to the programmers,”
Joyce said, adding that programming
stock multiples started to expand last
year as more and more content companies
embraced digital platforms.

“Once the cable companies started mitigating their
losses, it made the cheapness of the distributors relatively
more attractive,” Joyce said.

And cable stocks did rise at a a healthy clip during the period
— with Charter Communications leading the charge,
up 30% ($11.69 per share) to $50.63 each in the first quarter.
Charter was followed by Comcast (up 12.5%), Time Warner
Cable (up 8%) and Cablevision Systems (up 2.3%).

Franklin Resources bought about 1.2 million Comcast
Class-A shares during the period, but shed about 7.5 million
Comcast Class-A Special common shares, which have no
votes. But even that wasn’t its biggest sell — Franklin cut its
stake in Charter by more than half, selling 8.7 million shares
in what was at least in part a likely opportunity to take advantage
of the stock’s appreciation during the period.

Joyce added that other factors could influence buying a
particular stock — he added that Time Warner Cable was
particularly attractive to mutual funds because it has the
highest dividend in the sector and has launched an aggressive
$4 billion share-repurchase program.

Profit-taking also could have played a big role in the decision
to sell a stock. Some of the biggest sell targets also
had the biggest run up in their stock price in the period —
Th e Walt Disney Co. led programmers with a 20% rise in
price during the fi rst quarter, followed by Viacom (16.2%);
News Corp. (13.4%) and Time Warner Inc. (11%). Discovery
Communications shares declined by 4.3% in the quarter
but was one of the top purchases by FMR in the period,
indicating that they saw the stock as a bargain.

Comcast, DirecTV and AT&T led the charge in the quarter
— they were among the top buys of three of the fi ve funds examined
in the quarter. FMR LLC, the parent of the Fidelity mutual
funds, bought the largest block of Comcast (13.9 million
shares) and AT&T (14.6 million shares) in the period. Capital
Research Global Investors, part of Los Angeles-based Capital
Research & Management, the parent of the American Funds
and run by a cadre of portfolio managers including media investment
legend Gordon Crawford, purchased the largest
chunk of DirecTV in the period, about 7.9 million shares. Capital
Research also added 4.4 million shares of Comcast, building
on the 60.7 million shares of the cable giant it bought in the
fourth quarter. Capital Research now owns about 100.3 million
shares of Comcast, according to documents filed with the Securities
and Exchange Commission.

COMCAST A BEST BUY

Joyce said that based on trading multiples, Comcast is the
cheapest stock in the cable universe. Time Warner Cable,
he added, has made several recent “shareholder-friendly
moves,” including increasing its dividend by about 20%
and launching an aggressive $4 billion share-repurchase
program. But the funds are careful not to put too much of
their money into a single sector — as evident by some like
Janus which added significant positions in programmers
and distributors during the quarter.

“I think there is definitely an asset-allocation mindset,
whereby some diversified funds try to keep a rebalancing
focus and aren’t going to load up on a sector,” Joyce said.
“They will swap in and out of names.”

October
November