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April 16, 2008

Catching Up With Cable Stocks

Cable stocks have acted pretty well this year. Comcast is up a bit and Time Warner Cable is down slightly. Both have easily outperformed the S&P 500. The other large cap cable stock, Cablevision, is down about equal to the market but at year end it was still in the process of being taken private, a deal which fell apart.

The better action in the group is reflected in a better tone in the research I read on the group. I think the combination of dramatically reduced multiples, still reasonable growth of 8-10%, and lowered expectations is responsible for the improved stock prices and research tone.

The next big move in the stocks will be triggered by 1Q08 earnings reports. I think the shares trade up if numbers are merely in line. That means all numbers – subscribers, revenue, cash flow, and especially capital spending.

Despite the more hopeful outlook, there are two risks that are gaining added attention....

....First, the threat of mobile broadband to the high speed internet business is growing. Cable sat out the wireless spectrum auctions providing a relief to investors. However, with AT&T and Verizon making growing noise about mobile broadband, cable companies need to respond. The rumored joint venture with Sprint and Clearwire seems like a decent solution but regardless of the decision cable makes investors will be worried about the capital commitment. Look for a lot of questions on wireless on upcoming earnings calls.

The second risk is new noise on an old risk: a la carte programming. FCC Chairman Martin admits that he lacks authority to implement a la carte programming at the consumer level. However, the issue has regained some traction recently due to lobbying by the American Cable Association. The ACA represents small and rural cable operators. Many of these cable systems lack capacity and owners are frustrated by requirements from programmers like Viacom and Time Warner to offer only packages of channels. ACA representatives are lobbying hard for "wholesale a la carte" purchasing capability and Chairman Martin has indicated that he thinks the FCC has authority to implement it Whether he has the votes is another matter. For cable investors as long as the issue remains alive, it is a headwind.

Northlake is not long any cable stocks presently but despite being burned on Comcast in 2007, I'd be willing to get long if 1Q08 results meet expectations.

Posted by Steve Birenberg at April 16, 2008 11:09 AM in Comcast/Cable TV