June Bug Bites Cable Stocks7/04/2008 8:00 PM Eastern
Cable stocks tripped in the month of June, erasing what was shaping up to be one of the biggest rallies in years for the sector. And while much of that June decline was due to market forces out of the industry’s control, some analysts are expecting that falloff to continue at least for another month, when results for the seasonally weak second quarter begin to trickle in.
After enduring a brutal 2007, when stock prices in the sector were down a collective 28%, cable stocks appeared to be headed for one of their biggest rallies this decade, on track to outpace the 40% gain the sector enjoyed in 2006. With investor optimism in high gear after a strong first quarter — when several large cable companies appeared to reverse the basic-subscriber-loss trend of the past few years — cable stocks were up a collective 12.25% between Jan. 2 and May 30, well ahead of the 3% the sector gained in the same period of 2006. Comcast was leading the charge – up 27% ($4.80 per share) to $22.50 each.
And then came June.
In the span of a few weeks, that 12% gain became a 3% decline as the stock market in general went into a free fall over recessionary fears and rising oil prices. The Dow Jones Industrial Average lost 10.2% of its value during that same period, its biggest June decline since 1930. Cable, once thought to be “recession-proof,” turned out to be anything but in June, as stock prices declined a collective 13.17% during the month.
|Company||Jan.2, 2008||June 2, 2008||June 30, 2008||% Change|
|SOURCE: NASDAQ and Multichannel News research|
|Time Warner Cable||$27.47||$29.74||$26.48||-3.60%|
“Investors have been spooked by fears of economic weakness, telco-driven price wars, additional capital spending, and longer term disintermediation,” wrote Sanford Bernstein cable and satellite analyst Craig Moffett concerning the recent downturn in the stock prices. “All are wearily familiar themes for investors; indeed, they were all important themes at the start of the ’06 rally, as well.”
The decline is expected to continue at least into late July and early August, when cable companies are scheduled to release their second quarter results. The second quarter is traditionally a weak one, as subscribers turn off service as they move to summer residences and college students return home for the summer.
Collins Stewart senior media analyst Thomas Eagan said that there are two potential hits for the sector in the second quarter — the first is that basic subscriber losses will be even bigger than anticipated and the second is if Comcast reveals that capital expenditures will increase in 2009.
Eagan feels that Comcast is on the verge of a big capex increase, mainly to boost its HDTV channel capacity. And the last time Comcast increased its capex guidance (in 2005), the stock finished the year down more than 20%.
“I think HD channels are more important than HD choices,” Eagan said. “I think people want HD channels, not just HD On Demand.”
That would mean making the network all-digital to recapture enough bandwidth to significantly boost HD channel capacity, Eagan continued. And that will cost money.
“Whether they use digital to analog converters or digital set-top boxes — maybe they will use a combination of both — I think it’s going to result in a big 2009 capex number,” Eagan said.
While most analysts believe that seasonal weakness will continue, they are also expecting that operators will continue to maintain double-digit revenue and cash flow growth through new services like digital cable, high-speed data and telephony.
Miller Tabak media analyst David Joyce said that he expects the stocks to rally hard in the second half of the year.
“I do think that they will be up from here,” Joyce said. “They still are a cheap form of entertainment and one of the last things that people get rid of in a recession.”
The notion that cable is recession-proof has been around for years, but hasn’t really been put to the test since the 1990s. And though the economy is not officially in a recession yet — that would take two consecutive quarters of negative gross domestic product (GDP) growth and a 20% decline in the major stock market indexes — there is some fear that customers may drop premium channels like Home Box Office or Showtime or even services like high-speed data to keep their cable bills more manageable.
Dropping premium channels was a concern of Showtime CEO Matt Blank at the SCTE Cable-Tec Expo in Philadelphia last month.
“It used to be people said that in a recession, people buy more beer and cigarettes, and television consumption goes up,” Blank said at the conference. “Video has become much less important to our suppliers, which is a challenge for us because the premium market requires a lot of care and feeding.”
But Blank was optimistic that Showtime still has room to grow.
Comcast chief operating officer Steve Burke, speaking at the same conference last month, said that while cable may not be recession proof, it is still in a better position than some other industries.
“I don’t think we’re recession immune. I think we’re recession resistant,” Burke said. “The two most important services for consumers are television and broadband.”
And Moffett still believes that the “2008 Cable Rally” still has legs, mainly because of the digital transition set for Feb, 2009. According to Moffett’s estimates about 14 million customers currently have analog TV sets, which would require them to either switch to cable, satellite or telco pay TV service or purchase a converter box between now and the February deadline.
“The digital TV transition could represent a once-in-a-generation catalyst for cable stocks,” Moffett wrote.
Todd Spangler contributed to this report.