Stocks Bounce Back, with Charters Help

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Cable operators touted new-service growth last week, following a cable-stock tailspin the preceding Friday.

Cox Communications Inc.-which inspired the nosedive after analysts drew some depressing conclusions from an earnings report-noted that it passed the 1 million mark in new-revenue-generating units. RGUs are a combination of digital-cable, high-speed-data and telephony customers that are a benchmark in tallying the growth of new services.

Then last Thursday, Charter Communications Inc. said it might be on the way to hitting 1 million digital-TV customers by the end of the year. The MSO also reported 16.4 percent cash-flow growth in the second quarter, fueled by increases in digital and high-speed-data subscribers.

Last week, cable shares began to crawl back from the July 28 decline, with many regaining most of their losses by the end of last Thursday.

Charter popped up $1.56 per share, or 11.2 percent, last Thursday after reporting a 9 percent revenue gain and the cash-flow increase to $373 million. Charter also had 375,000 digital subscribers at the end of the quarter, a gain of 150,000 customers.

Other gainers last Thursday included Adelphia Communications Corp., up $1.31 per share to $35.69; Cablevision Systems Corp., up $2.75 to $66.25; and Time Warner Inc., up $1.38 to $76.63. Cox rose $1.56 to $38.50, but it still lagged behind its July 27 close of $43.88.

Bank of America Securities analyst Doug Shapiro called the downturn in cable stocks understandable, but mostly unwarranted.

"The perception is that if Cox can miss their numbers, then no one is immune," Shapiro said. "Also, in explaining [the cash-flow shortfall], Cox used the magic word: competition. It plays into investors' worst fears."

Part of Cox's problem came when it noted competition from U.S. West-now part of Qwest Communications International Inc.-in Phoenix. U.S. West has been offering a video-digital-subscriber-line service in parts of Phoenix where Cox has yet to upgrade, and the telco gained about 50,000 customers.

"The causes of Cox's problems in Phoenix are fairly isolated issues," Shapiro said. "There is not a lot of visibility that this kind of environment can replicate itself across the country quickly."

Shapiro said it might take a while for Cox to fully rebound. The company has been one of the strongest performers in cable, with a price consistently at between 15 times and 16 times annual per-share cash flow. Other stocks in the sector trade at between eight times and 13 times cash flow.

After the earnings report, Cox's multiple dipped to 12.1. At $38.50 per share, the multiple was back up around 13.1 times 2000 cash flow, according to a report last Friday from Goldman, Sachs & Co.

"Cox might take a while," Shapiro said. "People are quite possibly going to remain on the sidelines until they get closer to the third-quarter numbers. If they put up the numbers, there is no reason why they can't reassume that kind of premium valuation or move toward the top end of the range."