Cox Rocked by Investor Shock


Cox Communications Inc. and other cable stocks got hit last Friday after a Cox earnings report set off investor fears about increased competitive pressures.

Despite strong basic-cable subscriber growth of 2.2 percent for the period, revenue and cash-flow growth of 12 percent and 7 percent, respectively, trailed analysts' expectations. Wall Street expected revenue growth of 13 percent in the quarter and cash-flow growth of 9 percent.

Cox cited increased spending to roll out new services. But analysts noted increased digital-subscriber-line provider competition from U S West in Phoenix-Cox's largest system, with 617,000 customers-and from SBC Communications Inc.

U S West began offering a video-over-DSL product in Phoenix in 1998. As of January, the regional Bell operating company had about 16,000 subscribers. Cox assistant treasurer Mark Major estimated that U S West, now part of Qwest Communications International Inc., has about 40,000 to 50,000 subscribers in the Phoenix area.

Major said Cox has upgraded about 60 percent of the Phoenix market, and U S West has targeted the other 40 percent of customers in the area. However, he added, increased marketing efforts, as well as continued upgrades, are helping to win those customers back.

"We feel like we're turning the corner in Phoenix," Major said.

PaineWebber Inc. vice president of research Tom Eagan was concerned about increased competition from U S West and SBC, the latter of which has been rolling out high-speed DSL services in Cox markets at an aggressive pace.

In his research report, Eagan expected Cox's financial results to negatively impact cable stocks, "as the Street will inaccurately assume that these competitive pressures are impacting all operators."

But Eagan wrote that Cox was in a special situation-about 64 percent of its cable subscribers are in RBOC territories with aggressive competitive rollouts.

In contrast, cable operators like Cablevision Systems Corp. and Comcast Corp. mainly compete with Verizon Communications and BellSouth Corp., two RBOCs that have been less aggressive in their DSL and video rollouts.

Nevertheless, investors starting dumping cable stocks at an alarming rate, sending Cox shares down $6.81 apiece, or 15.5 percent, to $37.06 in afternoon trading last Friday.

Other cable stocks didn't fare any better, with Comcast down 8 percent to $37.85, Charter Communications Inc. down 4.4 percent to $13.62 and Cablevision down 4 percent to $63.81.

Also seeing afternoon drops were Adelphia Communications Corp. (down 10.3 percent), AT & T Corp. (2.73 percent), Time Warner Inc. (1.7 percent), Mediacom Communications Corp. (1.5 percent) and Insight Communications Co. Inc. (2.4 percent).

Tiny Classic Communications Inc. was the sole gainer in the cable sector, rising 50 cents per share in the afternoon to $5.56.

Cox reported cash flow of $337 million on revenue of $879 million in the quarter. The company also surpassed the 1 million mark for new-revenue-generating units-digital-cable, high-speed-data and telephony customers-in the period.