Cable Stocks Are Actually Beating the S&P This Year

Cable World,  March 24, 2003  

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Byline: MAVIS SCANLON

What a difference three and a half months can make.

To cable stocks, that is.

Since the start of the year, shares of the top cable operators were up 15.3% as a group through Friday. Not bad since the S&P 500 was up 1.8%.

Cablevision Systems, for instance, which closed at $20.25 last week, has rebounded from its August 2002 low of $4.67. Though well below its 52-week high of $37.08, the MSO has bolstered investor confidence by divesting noncore assets such as the Bravo network and its wireless PCS licenses. Beating estimates for digital subscriber additions has also boosted confidence among Cablevision investors. With a median 12-month price target of $25, analysts are betting the stock has room to run. Of 19 analysts who cover the stock, 14 either rate it a strong buy or a buy.

The big question of course is whether the sector can maintain its climb.

"At this point I think they are pretty fully valued," Alan Bezoza, an analyst at CIBC World Markets, says of cable stocks. If the economy remains in the doldrums, Bezoza fears that digital churn may spiral upward as consumers, seeking to lower monthly bills, may downgrade to a lower tier of video service.

Cable's ability to continue outperforming the market "depends a lot on sentiment," says Todd Bernier, an analyst at Morningstar. "The elite of the industry will continue to generate shareholder interest, especially Comcast. If they can work their magic this will be a winner company."

But even the better-positioned companies will need to deliver on promises of free cash flow over a period of several quarters, Bernier says.

Other factors are contributing to the higher share prices, including lower capital spending and a recovery in advertising sales. Investor sentiment also has been bolstered by Comcast's upbeat report on its integration of the AT&T Broadband systems it acquired last year.

At $29.33 Friday, Comcast has risen steadily since plunging to $17.40 last October. Analysts are overwhelmingly positive on Comcast, with the average 12-month price target at $35. Eleven of 26 analysts who cover the stock rate it a strong buy, and another 11 rate it a buy.

But the near 70% run-up in Comcast shares since October, coupled with the remaining challenges the company faces in integrating the AT&T systems, gives Bezoza pause. Comcast is currently "priced for perfection," he says. If the company does not meet every target, the stock could take a hit.

Some observers are more sanguine. Niraj Gupta, an analyst at Salomon Smith Barney, has an "overweight" rating on the group, meaning he expects shares to do better than the overall market over the next 12 to 18 months.

Despite the run-up, cable stocks remain way off their highs, and not all are up. Charter shares stand at a mere 97 cents. And shares of smaller MSOs Mediacom and Insight are basically flat this year.

THE NEXT QUESTION:

*How much will advanced services such as VOD, HDTV and home networking affect the pricing of the MSO group's shares in 2003?

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