It may be time to get back into cable stocks. After a yearlong selloff that clobbered the share prices of cable companies, a number of analysts now say that investors overreacted to the threat posed to cable providers by telephone-company competitors.
And recent positive results from Cablevision Systems Corp. suggest that cable companies may be well-positioned to compete against the new entrants, which offer television services and Internet connections.
That means investors have the chance to pick up stocks such as Comcast Corp., Time Warner Cable Inc. and Cablevision on the cheap.
"We recommend purchasing the stocks at current prices," said Chris Marangi, an analyst at Gabelli & Co., which owns shares of Comcast, Time Warner Cable and Cablevision. "The stocks present compelling values."
While cable stocks lately have bounced from bottoms hit earlier this year, they still are trading at 10-year lows along several key metrics. Comcast, for instance, at its current share price of about $20, is trading at a ratio of enterprise value to earnings before interest, taxes, depreciation and amortization of six. That is nearly half the ratio at which cable stocks have traded in the past decade, said Sanford C. Bernstein & Co. analyst Craig Moffett. And on a price-to-sales and price-to-cash-flow basis, shares are also near 10-year lows, said Ned Doughat, an analyst at Ockham Research LLC.
Big changes in sentiment aren't new to the cable sector, which over the years has been pummeled by worries about the threat of satellite-TV competition or the heavy capital investment needed to upgrade cable systems.
"Cable stocks can be a frenetic investment, and there is a component of investor fear that can quickly come to the surface when people work themselves up over some issues," said Tom Russo, portfolio manager at Gardner, Russo & Gardner, which owns Comcast shares.
Recently, the threat posed by Verizon Communications Inc.'s Fiber Optic Service television and Internet service has investors in a lather. Verizon surprised many observers in the past couple of years by aggressively rolling out the service and signing up one million TV subscribers as of January.
The technology, which includes super-fast Internet connections, has received rave reviews, and Verizon plans to spend about $23 billion on the service - intensifying a rivalry with cable companies, which already had begun offering phone services.
Late last year, Comcast, the biggest cable operator by subscribers, was forced to lower its estimate for how many new customers it would add in 2007, and executives acknowledged that Verizon was taking some of their subscribers.
But cable bulls argue that there isn't any reason to panic. For starters, while generating massive amounts of attention, phone-company expansions are limited by geography.
By 2010, Verizon expects that FiOS will be able to reach 18 million households - about 15 percent of the overall U.S. market at that point - noted Mr. Moffett. AT&T Inc.'s less technically ambitious U-Verse - which had its share of technical issues and has received some negative reviews in regard to quality of service - could reach 30 million households, or 25 percent of the U.S. market.
Verizon hasn't disclosed how much of its territory it plans to reach beyond 2010. But its territory, primarily the Northeast, overlaps with 34 percent of Comcast's areas and 43 percent of Time Warner's, and AT&T's U-Verse will overlap with 30 percent and 42 percent of each respective cable company's neighborhoods, noted Gabelli's Mr. Marangi. The only public operator heavily exposed is Cablevision, where the overlap with Verizon eventually will reach 90 percent.
Cablevision's fourth-quarter results, released in February, offered investors some good news, showing that the cable firm added TV subscribers ahead of analyst expectations - even though it faces competition from FiOS in 25 percent of the households it serves. Still, Cablevision stock has fallen about 16 percent during the past month amid reports the company is considering acquiring - either on its own or with others - concert promoter AEG, the Sundance Channel and the Long Island, N.Y., Newsday newspaper.
Cable executives argue that cable providers are getting the better of the phone companies in the contest for customers. For every video customer cable operators lose, they are signing up several phone customers - and profit margins on the phone customers are higher than they are in the video business. Massive and rising programming costs - the fees distributors pay for the channels they carry - make video the lowest-margin segment of the TV-Internet-phone triple play.
Comcast, for instance, has a profit margin of 55 percent in video but 70 percent in phone and 80 percent for broadband, estimates Bernstein's Mr. Moffett. The picture is grimmer for Verizon, given its lack of scale. Because the company has so few TV customers, it hasn't negotiated the kinds of favorable programming deals its cable rivals have. Its profit margins in video are just 25 percent, according to Mr. Moffett's estimates. Its phone margins are about the same as Comcast's.
Of the three big public cable companies, Comcast might be the best bet for a stock upswing. Under pressure from dissident shareholders, the company recently reinstated a dividend for the first time in nearly a decade and announced the acceleration of a $7 billion share-repurchase program. And it said it was putting a lid on capital spending this year. Capital spending will drop to 18 percent of revenue in 2008, according to Comcast's forecasts, as compared with 20 percent in 2007.
Time Warner Cable - trading at an enterprise value to Ebitda of 5.9, according to Sanford C. Bernstein - also looks cheap compared with the broader market. But Time Warner Inc., which has an 84 percent stake, is expected to spin off the cable arm in coming months, which could bring a flood of new Time Warner Cable stock onto the market, possibly depressing the price.