Cable Operators

Third-Quarter Slump Hit Cable Stocks Hard

10/10/2011 12:01 AM Eastern

Cable stocks took a pounding during
the past three months, driven downward
by a meltdown in the overall stock market and
the residual effects of what for some companies
was a disappointing second
quarter.

The third quarter was a
bad one across the board for
the public markets. The Dow
Jones Industrial Average sank
to a new low for the year on
Sept.30, then fell again the
next day. For the third quarter,
the Dow fell 12.1%, with
the S&P 500 dipping 14.3% in
the same period.

With that as a backdrop, cable
stocks fared slightly better.
The Multichannel News Multichannel
Multimedia Index
(MMI), which tracks 46
stocks including distributors,
programmers and equipment
vendors, fell about 11.1% in the
period.

OPERATORS HIT HARD

MSO stocks took the biggest
hit in the third quarter, falling
20.5%, led by Cablevision
Systems, which plunged
40% ($10.52 per share) from
$26.25 on June 30 to $15.73
on Sept. 30.

Other MSOs also weathered
double-digit declines.
Time Warner Cable shed
19.7% ($15.37) to $62.67; Comcast
dropped 17.4% ($4.42) to
$20.92; and Charter Communications
dipped 13.7% ($7.42)
to $46.84.

Satellite-TV stocks Dish Network and Direc-
TV also experienced double-digit declines, with
Dish falling 18.3% ($5.62) to $25.05 and DirecTV
dropping 16.8% ($8.55) to $42.27.

Programming stocks didn’t escape the selloff
either, as the sector dipped nearly 18% during
the quarter.

Among the biggest content-provider declines
were with AMC Networks, down 26.6% ($11.55)
to $31.95; The Walt Disney Co., down 22.7%
($8.88) to $30.16; and Time Warner Inc., down
17.6% ($6.40) to $29.97.

Viacom, which started its decline last month
when CEO Philippe Dauman said third-quarter
ad sales growth would fall short of double-digit
targets, fell 16% ($9.12) during the period to
$48.36 on Sept. 30.

While the cable sector is no stranger to volatility
— cable stocks are notoriously news- and
sentiment-driven — this time seems a little different.

In the third quarter the news that drove the
sector down the most wasn’t the usual noise
surrounding increased competition from telcos
and over-the-top video. It was the fear that the
European debt crisis would send the U.S. economy
into another tailspin.

The market malaise prompted one cable
watcher, Miller Tabak media analyst David
Joyce, to adjust his price targets for the sector
downward.

In a note last week, Joyce said that while he
still has “buy” ratings on the stocks, he has reduced
his short-term price targets by as much as
30% in some cases, citing what he believes are
overblown fears of third-quarter declines.

Joyce said he expects the stocks to react well
through the third-quarter reporting season,
which begins later this month.

“Clearly global contagion is a risk
as consumers are on a de-leveraging
path worldwide,” Joyce wrote.

Collins Stewart media analyst
Tom Eagan said the decline in MSO
stocks is largely due to weaker financial
performance in the second
quarter. Aside from Comcast, which
grew revenue nearly 6% and operating
cash flow 7% in the period and
managed to reduce basic customer
losses, other MSOs failed to meet expectations.

“It reflects the second quarter,
which was pretty traumatic for a lot
of the operators, namely DirecTV,
Time Warner Cable and Dish,” Eagan
said. “I think part of it was a disappointing
Q2, coupled with what
happened in the marketplace.”

BOUNCE-BACK AHEAD?

Eagan expects a better fourth
quarter, adding that programmers
should be encouraged by a strong
scatter market, which rose into
the mid-teens during the third
quarter.

“What we have heard anecdotally
is that some big advertisers
that last year tried the Internet
when they rolled out new campaigns
weren’t happy with the
results, so they came back to television,”
Eagan said. “2011-2012
should be an up year.”

Joyce was encouraged that the
two biggest MSOs — Comcast and Time
Warner Cable — have said that third-quarter
results should be better than last year.

But the analyst cautioned that cable
stocks, which have traditionally been newsdriven,
are in the middle of an information
drought as companies prepare to release
third-quarter results. That could add to their
volatility.

“We still have another two weeks of an information
vacuum before any of these companies
start reporting,” Joyce said. “This is
normally a very susceptible time of the year
historically for the stock market.”

March