So far, it looks like 2012 was a good year to be a cable investor — a very good year.
Cable stocks across the board had one of their best years in a long while in 2012, with MSOs up 41%, programmers up a strong 38% and satellite-TV service providers up 23% through Dec. 18. Barring a precipitous fall in the last two weeks of the year, cable could end up having its best year since 2009, when MSO stocks rose in the 40% range.
This year is different from 2009, when the rise was basically a correction — cable stocks were down 22% in 2008, the height of the Great Recession. In 2012, the growth was mainly organic, as MSO stocks were flat in 2011 and programming stocks fell by a collective 2% that year.
Stocks of the four publicly traded MSOs — Cablevision Systems, Charter Communications, Comcast and Time Warner Cable — rose a combined 41% between Dec. 30, 2011 and Dec. 18, 2012. Comcast led the pack, with an increase of 60.5%. The other MSOs also enjoyed healthy increases: Time Warner Cable rose 51.4%, Charter was up 30.2% and Cablevision rose nearly 6%.
For the operators, it was a combination of strong performance (basic-video subscriber losses declined sharply at Comcast) and renewed optimism in the cable model.
Pivotal Research Group principal and media and communications analyst Jeff Wlodarczak said he attributes the bulk of the MSO gains this year on misplaced perceptions late in 2011 that cable operators had hit a growth wall.
“Instead, they have continued to take quite significant share in data, video-subscriber losses have moderated, the telcos have mostly backed off [from] expanding into new markets with video [and] the worries about over-thetop [players] have moderated significantly,” Wlodarczak said. He noted that operators also have returned capital to shareholders fairly aggressively and the outlook is for continued cash-flow growth.
Cable operators also managed to beat back competitive threats from telcos, satellite and so-called over-the-top providers such as Netflix.
Comcast reduced its basic-customer losses by 40% in 2011 and was on track to reduce those losses by at least another 25% in 2012. While most analysts anticipate that the cable sector will continue to lose customers as a whole in 2013, ISI Group media analysts Vijay Jayant and David Joyce expect that Comcast may cross into positive territory in the fourth quarter of 2012 and the first quarter of 2013.
“It’s important to highlight that fundamentals have been improving for the core business for the cable companies,” Joyce said in an interview. “Yes, broadband continues to take share, but also in this mature pay TV market in the U.S., satellite and telcos are starting to experience the same sort of seasonality that cable has been experiencing for a while.”
On the programming side, a renewed optimism regarding the advertising market and the overall economy, with a little M&A speculation sprinkled in, has helped push up shares in the sector by nearly 38% so far this year, led by Discovery Communications. Discovery, which has reported consistent high single-digit domestic advertising revenue growth for the first nine months of the year, saw its stock rise 55.3% ($22.64 each) to $63.61 on Dec. 18, from $40.97 on Dec. 30, 2011.
Cable legend John Malone’s Liberty Media came in second, rising 47.4% ($37.01) mainly after it said it would spin off its Starz premium channel into a separate stock and speculation it may do the same for its holdings in Sirius XM Radio. News Corp., parent of Fox News Channel, FX and other cable stalwarts, came in a close third, with a 43.8% increase in its stock price for the year.
Also driving programming stocks was a strong international market, Joyce said. Despite some macroeconomic concerns over European debt, international programmers produced strong affiliate-fee and advertising increases for companies like Discovery, he said.
Domestically, Joyce remained optimistic that advertising growth will continue, adding that some programmers may see healthy increases in the fourth quarter, mainly because of more favorable comparisons to the fourth quarter of 2011, when several channels had fewer National Basketball Association games because of the league lockout.
“It seems like the ad market is in a stableto- moderate growth phase,” Joyce said.