Some Cable Upside Seen Amidst The Gloom


New York -- Influential Merrill Lynch media analyst Jessica Reif Cohen painted a gloomy picture of the overall economy at an industry conference last Tuesday — but said cable operators, having already taken big hits in their stock prices, could benefit from steady cash flows and potential upsides from next year’s digital-TV transition.

At the OnScreen Media Summit here Dec. 2, sponsored by Multichannel News and Broadcasting & Cable, Reif Cohen said that Merrill’s own economists are bearish on the state of the economy, predicting that the recently called recession could be “one of the longest and deepest in our lifetime.”

Those same economists estimate that the U.S. should brace itself for at least another four quarters of negative growth in the gross domestic product, she said.

Cable was an early indicator of the gloom, Reif Cohen pointed out. Cable stocks declined 28% in 2007.

“Entertainment and diversified media and cable stocks tend to go down a year before a recession,” she said. “The market was telling us a year ago what we now know.”

The good news in that is cable stocks historically hit bottom faster than the overall market and, in turn, recover sooner.

While cable stocks aren’t recession-proof — more “recession-resistant” — the sector could outperform the rest of the market on operating metrics, turning in mid-single-digit revenue, cash flow and free-cash-flow growth, Reif Cohen said. That, in turn, could be good news for the stocks.

At the moment, Collins Stewart media analyst Tom Eagan pointed out on a separate panel, trading multiples for MSO stocks are now 4.5 times to 5 times 2009 estimated cash flow. During the last recession, those multiples were 10 times forward-looking cash flow, he said.

“They are trading at half the level they were, although they have much better balance sheets,” Eagan said.

Reif Cohen said strong cable fundamentals are reflected somewhat in the stocks. Big cable-operator stocks are down about 45% this year, but entertainment shares have fallen 45% to 65% and broadcasters like CBS have plunged as much as 80%.

The fourth quarter could be critical for cable stocks, as satellite-TV provider DirecTV has hinted at growing demand for its products while some MSOs, notably Time Warner Cable, have adopted a more bearish outlook.

Early next year, the federally mandated digital transition could present a significant opportunity for cable to reel in non-subscribers. Eagan said the digital transition could lead to cable operators adding a million subscribers who previously were analog holdouts.

Comcast vice chairman Julian Brodsky thought that was overly conservative, saying cable could add as many as 2 million to 2.5 million new customers as a result of the digital transition.

“I think it’s a shoo-in for 1 million [additional customers],” Brodsky said.

Brodsky tried to downplay the long-term importance of concerns about fourth-quarter performance for cable. The industry has shown its resilience countless times before, he said.

“Living quarter to quarter is no way to live,” Brodsky said. “The balance sheets have never been better; there is no need to go to the capital markets for at least the next five years. It couldn’t get any better than that. There will still be free cash flow, operating cash flow, through 2010. How many industries can say that?”

Reif Cohen, also bullish on the digital transition’s impact for cable, said operators could offer a bare-bones video service for free or for a nominal fee, drawing in non-subscribers and then upselling them broadband service (with 85% to 90% profit margins) and phone service (with 50%-plus margins).

Retransmission-consent payments to broadcasters are a growing concern to cable operators and their video margins. Reif Cohen said the next big retransmission battle could involve Dish Network and Spanish-language broadcaster Univision Communications. The distributor with the most exposure to Univision is Dish, which she said has about 2.3 million Hispanic subscribers. (Some analysts have also fretted about Time Warner Cable’s potential Univision issues, especially as its cable markets include Los Angeles, New York, Dallas, San Antonio and Austin, Texas.)

“The question is, does Univision just go for the jugular?” Reif Cohen said. Dish “has been litigious with companies in the past,” she pointed out. “Do they take Univision off the air, lose a lot of subs and then pay a lot of money, or do they just pay a lot of money? I think the leverage in this case is with Univision.”

 For more coverage of the OnScreen Media Summit click here.