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Cable Operators

2011: In Like Lion, Out Like Lamb

12/19/2011 12:01 AM Eastern

Looking back on 2011, the biggest
(and saddest) question of the year was what
might have been.

Cable stocks were on track
for double-digit percentage
growth in the first half of the
year, but a dismal second
half, marred by competitive
concerns and a volatile stock
market, erased most of those
gains as the year comes to a
close. Barring a tremendous
late-year surge, MSOs and
programmers should finish
the year relatively flat.

But it all could have been
so different. Cable stocks
were on a steep upward trajectory
in the first half of the
year, fueled by strong performance,
robust shareholder
returns and optimism for the
future. That was evidenced in
the stocks’ performance —
MSOs were up 21.2% during
the first half, with programmers
up nearly 7% and satellite
stocks up nearly 37%.

But the second half of 2011
was a different story. Renewed
competitive concerns,
fanned by less-than-stellar
third-quarter results at Cablevision
Systems and Time Warner Cable and
a precipitous drop in the overall stock market,
sent the sector downward.

The Dow Jones Industrial Average, up
7.2% or 836 points in the first half of the year,
plunged 12.1% (1,500 points) from June 30 to
Sept. 30 as concerns over the European debt
crisis rocked global markets. While the Dow
has rebounded — as of Dec. 12, the index was
up about 3.8% (443 points) for the year — macroeconomic
issues continue to pressure the
market.

COLLATERAL DAMAGE

Miller Tabak media analyst David Joyce said
that the falloff in the second half for cable and
programming stocks was almost entirely due
to outside issues.

“There was a global macro correlation,” Joyce
said. “Very little of the stock activity in the second
half of the year was related to anything
fundamental.”

For MSOs, the downward slope began after
second-quarter results were issued in August,
highlighted by a belief that perennial growth
engine Cablevision had hit a wall, losing subscribers
and reporting anemic cash-flow
growth over the period. That disappointment
continued into the third quarter for Cablevision
and Time Warner Cable, which reported
slower-than-expected revenue and cash-flow
growth.

Pivotal Research Group principal and media
and communications analyst Jeff Wlodarczak
said that a combination of disappointing
results and a decision by some companies to
pull back on share-repurchase programs fueled
declines.

For MSOs, stock performance didn’t necessarily
follow financial results. Stock in
Comcast, which had by
far the strongest results of
the publicly traded MSOs
— four consecutive quarters
of improved basic
customer losses and midto-
high-single-digit revenue
and cash-flow growth
— rose only 5.9% for the
year. Charter Communications,
which continued to
lose customers and posted
modest revenue and cashf
low gains, watched its
shares rise 35.6% for 2011,
mostly on speculation that
it could be sold over the
next few years.

Although it started off
the year on a good note
— it improved basic-customer
losses significantly
— Time Warner Cable
couldn’t keep up that momentum
in the second
and third quarters, and its
stock suffered accordingly.
TWC shares dipped about
5.5% for the year, or $3.43
per share. Cablevision,
which reported flat cash
flow growth in the third quarter after a sluggish
2.3% gain in the second, was the biggest
decliner, losing 41% ($10.05 per share) of its
stock value during the year.

Both Joyce and Wlodarczak expect the
stocks to improve in the fourth quarter and
in 2012.

“At some point valuation will matter and
these names should work,” Wlodarczak said.

SATELLITE STRENGTH

Satellite stocks rose on strong financial performance
— DirecTV, up 16.6% for the year,
had its best quarter for net new subscriber
growth in nearly a decade — and a little luck.
Dish Network shares rose 30.5% for the year,
mainly on chairman Charlie Ergen’s savvy
bets on wireless spectrum, which increased
in value over 2011. Some analysts estimated
that Ergen’s wireless assets, for which he
paid about $3 billion, are worth about three
times that amount.

Programmers were less lucky, dipping
about 2% for the year, after rising about 7%
in the first half. Again, skittishness over the
health of the advertising market and the overall
stock market malaise battered the stocks.

Scripps Networks lost the most ground
(18.1%), with Time Warner, News Corp. and
Viacom posting modest gains.

Both analysts believe that with better visibility
in the advertising market — several
programming executives have said that firstquarter
ad sales are encouraging — the coming
months should bode well for the sector.

“2012 should be a better year,” Joyce said.

September