I am surprised that cable stocks have held up since last Thursday’s Wall Street Journal article which indicated a recent report from Cable Labs, the industry’s internal R&D arm, said that to keep up with exploding broadband demand and Verizon’s fiber rebuild, the cable industry would have to complete another costly upgrade of its plant.
In the past, an article like this would have caused cable stocks to sell-off and brought out lots of “I told you so” comments from the numerous cable bears. The bear case on cable is that the industry will have to dramatically increase its capital expenditures to remain competitive with satellite and telephone companies, reducing return on investment and sucking up free cash flow that could be used to buyback shares, reduce debt, to otherwise reward shareholders.
The fact that the shares were firm in the face of the article shows how much the sentiment given several consecutive strong quarters from Comcast, Cablevision, and Time Warner Cable. I think investors have finally realized that over the next year or two, cable is likely to continue its strong financial and subscriber performance. Even if the article has merit, the issue raised is a long-term one that is not likely to get in the way of the fundamentals driving the group for another year or more.
The article stated that CableLabs believes that growing demand for broadband and increasing use of pipe clogging video means that cable’s current fiber/coaxial cable network will not be sufficient to meet consumer demands. Further, Verizon will leapfrog the cable plant as it’s fiber to the home build out is completed…..

Interestingly, executives from major cable companies were quoted in the article throwing cold water on the CableLabs report. That is not surprising given the stakes but the article does leave out a lot of angles including how much any rebuild might cost if it became necessary. Cable already runs fiber to most neighborhoods so to match Verizon it would need just need to run fiber for the last mile or less in most cases. It is highly doubtful that the cost to upgrade would be anywhere near the much discussed $60 billion upgrade the cable companies completed a few years back. It is that upgrade that put cable in the driver’s seat today, by the way. The article does mention that technology advances and upgrades and the possibility of recapturing analog channels could mitigate the need to upgrade.
My thesis all along on cable has been that the industry had a multiyear window of opportunity where it could produce double digit growth with stable capital spending and high free cash flow. At the same time, investors were way too pessimistic about the timing of the competitive threat from the RBOCs. The only things that have changed is that Comcast has rallied over 25% this year and several quarters of the window have passed. The risk-reward trade-off is not quite as good today as it was in late 2005 or early 2006 but upside remains, particularly in Comcast, which will see even high growth rates in the next 6 to 12 months.