Finance

Investors Anticipate Strong Cable Earnings

Big Gains Expected at Comcast, TWC; Sandy to Hammer CVC's Q4 1/27/2013 7:00 PM Eastern

Wall Street is anticipating strong fourth-quarter performance from Comcast and Time Warner Cable as cable operators report their earnings this week, while the impact from Superstorm Sandy is expected to deliver a difficult period for Cablevision Systems.

Time Warner Cable is scheduled to kick off fourth-quarter earnings on Jan. 31, followed by Comcast on Feb. 13 and Charter Communications on Feb. 22. Cablevision has not yet announced when it will release its fourth-quarter results.

With its main systems in Long Island, N.Y., Connecticut and along the New Jersey shore, Cablevision was the U.S. MSO hit hardest by Sandy, which raged up the East Coast on Oct. 29. It is estimated that the superstorm took 131 lives and caused more than $63 billion in property damage and lost business in the U.S.

For Cablevision, power outages and downed plant impacted service for months. At its peak, about half of the Bethpage, N.Y.-based MSO’s 3.3 million customers were without service, mainly due to power outages. In the weeks after the storm, Cablevision restored service to most of those homes.

As a result of the storm’s devastation, most analysts are predicting a tough fourth quarter for Cablevision, with some anticipating as much as a 30% decline in adjusted operating cash flow and a 4% decline in revenue. Most of those declines are expected because of rebates the company has provided customers for lost service. Analysts predict the MSO could lose between 14,000 and 15,000 basic video customers in the period, in line with the 14,000 basic video customers the MSO lost in the prior year.

In an October research note, Canaccord Genuity media analyst Tom Eagan noted that Cablevision incurred about $20 million in additional costs from Hurricane Irene in 2011 and estimated that Sandy could rack up a bill of $25 million to $40 million for the cable giant. Without the Sandy effect, Eagan estimated, adjusted operating cash flow (AOCF) could decline between 18% and 19%. With the storm costs, that gap widens to 25% to 30%.

Morgan Stanley media analyst Ben Swinburne also expected a right turn for the MSO in the period.

“We expect 4Q12 to be the most difficult growth quarter of the year,” Swinburne said of Cablevision, adding that he anticipated cash-flow declines approaching 20% in the period.

Despite Cablevision’s woes, analysts expect continued good news from Time Warner Cable, Comcast and Charter.

As the first MSO out of the box, TWC is expected to report strong financial results, with revenue and cash flow expected to rise in the mid-to-low single digits. But its subscriber metrics are expected to lag some of its peers.

In a research note, Swinburne said TWC would report basicvideo losses of about 139,000 customers in the fourth quarter, up slightly from the 129,000 the MSO lost in the same period in 2011. But analysts are split on new-services performance — Swinburne anticipates high-speed data additions will be down in the quarter to 84,500 from 117,000 in the previous year, while Sanford Bernstein cable and satellite analyst Craig Moffett predicts they will rise to about 146,000.

The analysts are closer in their predictions for residential voice — Swinburne estimates an increase of 41,600 telephone customers in the period, while Moffett forecasts 39,000 additions. TWC added 37,000 voice customers in the fourth quarter of 2011.

At Comcast, the analysts envision another strong operational period, with basic-video subscriber losses continuing to fall. Comcast has improved basic-video customer losses for the past eight consecutive quarters. In the fourth quarter, Swinburne believes that trend will continue, predicting the nation’s largest MSO will shed about 7,000 customers, an improvement of nearly 60% from the 17,000 video subscribers it lost in the same period in 2011. Eagan expects Comcast to finally break into positive subscriber growth territory in the period, adding about 5,000 basic customers.

Charter has the most growth potential of all the publicly traded operators because of its low video penetration — about 33.6% of homes passed. And though the St. Louis-based MSO has a strong operations team, led by former Cablevision chief operating officer Tom Rutledge, and was the first MSO to show a positive video customer quarter in five years (20,000 in the first quarter of 2012), most analysts are expecting a slight rise in video losses in the fourth quarter. Swinburne expects the biggest increase — to a loss of 51,000 compared to a loss of about 46,000 in the same period in 2011.

TAKEAWAY

Analysts expect Comcast and Time Warner Cable to lead the way with strong fourth-quarter earnings.

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