Weaker-than-expected digital and basic subscriber growth in the second quarter, coupled with restrained deal flow in the first half of the year, will continue to pressure cable stocks, SunTrust Robinson Humphrey cable analyst Gary Farber predicted last week.
But cable might be able to drag itself out of the doldrums through continued strong operational performance, and by resolving some structural issues in the second half of 2002.
Cable stocks have been trading at a significant discount to growth: about 10 times estimated 2002 cash flow, compared with current cash-flow growth rates of about 14 percent, Farber wrote in a report. Two of the biggest names in the industry — Cox Communications Inc. and Comcast Corp. — reported that cash flow rose 16 percent and 15.3 percent, respectively, in the second quarter, although digital subscriber growth slowed for Cox.
Investors also appeared skittish over the added leverage for Comcast, once it completes its acquisition of AT&T Broadband. And smaller cable operators, like Cablevision Systems Corp., Mediacom Communications Corp. and Charter Communications Inc., are confronting structural and operational concerns.
Issues surrounding the AT&T Broadband and Comcast merger; AOL Time Warner's proposed initial public offering of its cable systems, slated for next year; and News Corp.'s put rights in Cablevision's regional-sports assets — valued at about $1 billion — have all been a drag on stocks, Farber wrote. Some relief could come when the AT&T-Comcast deal closes, probably in the fourth quarter.
Farber also believes an uptick in deal flow could give the market a jolt. In the month before the last sizable equity deal in the industry — Charter's $3.7 billion initial public offering in November 1999 — the cable sector was off about 3 percent. The month after Charter's IPO, the group's stocks rose 5 percent.
AOL Time Warner's planned IPO of its cable systems, possibly in the first half of next year, will test investors' appetites for cable stocks, but should have a positive effect because it will add another high-quality operator to the sector, with a deal currency for further consolidation.
Farber also felt the market should react positively to the AT&T Comcast deal, if only because the merger will remove the underperforming AT&T Broadband cable systems from the sector and place them under the control of a strong management team with a solid balance sheet.
Another positive from that deal would be any potential sales it could generate as the company rationalizes its cable footprint.