Industrials have been my favorite sector for the fourth quarter of this year; my latest recommendati...
Don’t Pull the Plug on Cable Yet
12/11/2007 12:00 am EST
George Putnam, editor of the Turnaround Letter, says investors are dumping cable television stocks overboard, making them look more attractive.
Wall Street seems to have a love/hate relationship with the cable TV stocks. A few months ago, investors loved them; now they hate them.
For example, the stocks of both Cablevision Systems (NYSE: CVC) and Comcast (NASDAQ: CMCSA)—two of the stronger cable companies with long trading histories—hit new five-year highs earlier this year. Now, they are both down more than 30% and are both trading at the same level they were in 1998.
As we’ve mentioned in a number of previous issues, the cable companies are locked in a battle with the major telephone companies to capture customers for the “triple play” of video, voice, and data. Not long ago, most investors believed cable was going to win the battle, and so the telephone stocks were undervalued. Now sentiment seems to have flipped 180 degrees, and many investors are proclaiming the phone companies to be the victors.
In fact, the battle is still in its very early stages. Moreover, it is quite likely that both groups will be winners. There is so much opportunity to offer new services and generate additional revenue that both the telephone and cable companies will prosper in the years to come. As investors realize this, the cable stocks should rebound from their current depressed levels.
Several of the cable companies have heavy debt burdens, but most of them have plenty of cash flow to support their debt.
Cablevision generates about two-thirds of revenues from its cable network, principally in the New York City area. It also owns a programming operation and sports and entertainment venues and teams, including Madison Square Garden in New York and the Knicks and Rangers that play there. Cablevision reported decent revenue and cash flow growth for the third quarter. The controlling Dolan family recently tried to take the company private at $36.26 per share, but shareholders found the offer inadequate. (It closed below $26 Monday—Editor.)
Comcast is the largest cable operator in the US It reported disappointing earnings for the September quarter, but its strong cash flow and huge customer base give the company good long-term prospects. It is aggressively offering new services, and there is even speculation that it might acquire a wireless provider. (The stock closed above $18 Monday—Editor.)
RCN (NASDAQ: RCNI) offers a competitive alternative to the monopoly cable providers in high-density residential markets. It was one of the first companies to bundle phone and Internet services with cable TV. Its aggressive use of debt pushed the company into bankruptcy in May 2004, but it emerged later that year with a much more reasonable capital structure. It has since expanded geographically beyond the Boston-New York-Washington, DC corridor, and it has broadened its customer base to commercial markets.
Consistent profitability has been elusive, but RCN appears to have the financial strength to continue expanding its product offerings. (It closed above $16 Monday—Editor.)
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