For Cable Stocks, A Year To Forget


Cable stocks took a beating in 2008, battered by a sluggish economy and a stock market in free fall, but it could have been worse. It could have been 2007.

Shares of the five publicly traded MSOs were down 22% in 2008, with Charter Communications once again being the biggest loser of the year, falling 93% or $1.09 per share to 8 cents each on Dec. 31. But the sector as a whole managed to perform better than in 2007, when cable stocks fell a collective 28% as investors worried about declining new home starts and competition from telephone companies Verizon Communications and AT&T.

Miller Tabak media analyst David Joyce said the poor performance in 2007 was a big factor in keeping 2008 losses in check, along with a late rally as investors began to plow money back into the “recession-resistant” sector.

Joyce said cable stocks started to feel pressure in the summer of 2007, when investors worried that declining new housing construction would further erode the customer base.

“That’s what started to unravel the cable stocks before everyone else,” Joyce said.

The stocks also managed to hold their own in the early part of the year — the MSO sector was actually up 17.8% between Jan. 2 and Aug. 29 — but collapsed with the rest of the market in September after the fall of investment bank Lehman Bros. triggered a sell off and a precipitous decline in the Dow. Cable’s slide started in mid September — the cable-operator stocks were down almost 15% for that month — and continued until the late December rally. The sector rose 20% that month, with Mediacom and Cablevision the biggest gainers, as investors began to seek shelter in “recession-resistant” cable companies.

The programming sector also saw a boost in December — shares were collectively up 11.6% for the month — which should lead to some optimism for the rest of the year.

Joyce said that although cable stocks buckled under the weight of the recession and the panic that consumed Wall Street, the declines weren’t because of any fundamental flaws at the companies.

“They [MSO stocks] collapsed when a number of institutions had to raise cash and get out of everything,” Joyce said. “They [institutions] got out of everything regardless of the business model.”

Compared to the market as a whole, cable operators performed well. The Dow Jones Industrial Average fell 33.8% in 2008, a loss of nearly 4,500 points to end the year at 8,776.39. It was the single largest percentage drop for the index since 1931.

Among the five publicly held cable companies, Mediacom Communications was the top performer for the year, falling 6.3% (29 cents) to $4.30 each on Dec. 31 from $4.59 on Jan. 2. Mediacom was followed closely by Comcast, which declined 7.6% ($1.38 each) from $18.26 to $16.88, for the year.

The rest of the sector experienced double-digit losses: Time Warner Cable fell 22.3% ($6.15 each) to $21.45 per share and Cablevision Systems fell 31.3% ($7.66 each) to $16.84 per share.

The real pain was felt in the programming sector — programmer stocks fell 47% for the year — a combination of a sluggish advertising market and an aversion to companies that had a single controlling shareholder.

News Corp., led by media mogul Rupert Murdoch, had to face a triple whammy — its television stations and networks rely heavily on the volatile advertising market, it is essentially controlled by the Murdoch family and it also has substantial holdings in one of last year’s most reviled industries for investors, newspapers.

Not that those assets have performed badly for News Corp. The media giant grew nicely in fiscal 2008 (which ended June 30), with cable-network operating income up 35% for the year. That trend continued in the first quarter of fiscal 2009, with cable operating income up 31% in the period ended Sept. 30.

Still, the company was battered by the stock market — News Corp. stock plunged 54.9% ($11.67 per share) to $9.58 for the year. News Corp.’s dismal stock performance was matched and beaten by just two other companies, both controlled by Murdoch’s media rival Sumner Redstone — Viacom and CBS.

Viacom shares fell 54.3% ($23.86) for the year to $20.12 and CBS was the biggest loser in the sector, shedding 69.9% ($18.99) of its value for the year.

Both Viacom and CBS had been affected by the downturn in the ad market — domestic ad revenue at Viacom was down 3% in the third quarter. And CBS was battered by the continued downturn in the broadcast TV market, with advertising revenue down 14% in the third quarter.

The competition didn’t fare much better. Although DirecTV ended the year almost at break-even — its stock price was down less than 1% for the year, its rival Dish Network was hammered by a declining subscriber base and the loss of its AT&T distribution contract. Dish stock plunged 66.5% ($22.05) in 2008 to $11.09 per share.

Joyce said that while 2008 was a year many would like to forget, he expects the cable sector to gain some ground in 2009.

Joyce was encouraged by Time Warner Cable’s guidance for the year, which was essentially unchanged.

“I think that means the fourth quarter we just got out of indicates that we’re close to the bottom,” Joyce said. “We’re expecting an emergence from the recession starting in the third quarter of this year.”