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Cable Stocks: Up, Up and Away

DEAL CHATTER DRIVES MSO SHARES TO NEW HEIGHTS 12/23/2013 12:00 AM Eastern

Consolidation speculation helped drive cable stocks to nearly unprecedented levels in 2013, up more than 40% for a second straight year and the fourth consecutive year of positive growth for the sector.

Shares in publicly traded cable operators — Charter Communications, Time Warner Cable, Comcast and Cablevision Systems — were up a combined 46.8% between Dec. 31, 2012 and Dec. 18. That’s building on a 42.3% rise in 2012, a 4.5% uptick in 2011 and a 38.8% increase in 2010.

Charter led the sector with a 71% increase in its stock price from $70.24 per share to $130.34 each on Dec. 18. Charter, which received a $2.6 billion investment from Liberty Media in March, has been making overtures to Time Warner Cable since June.

‘BEAR HUG’ COMING?

As of press time, Charter was expected to make a “bear hug” offer for TWC at around $130 per share, which would value it in the $60 billion to $65 billion range.

Aside from TWC — which was up 38.3% in 2013 — other MSOs have also benefited from consolidation talk. Comcast, which has been said to be considering launching a joint offer for TWC with Charter or another MSO, saw its shares rise 34.6% during the year. Even Cablevision, which has been plagued by negative growth issues, experienced a 10.2% rise in its stock price in 2013.

The thirst for a big deal has been the main driver for the stocks this year, analysts conceded, though they added that cable operators are also fundamentally sound. At least half the sector is expected to see revenue and cash-flow growth in the mid to highsingle digits for the full year.

Some would also argue that the overall growth in the stock market has also helped cable shares along during the year: For example, the Dow Jones Industrial Average was up about 25% as of Dec. 17 and the Standard & Poor’s 500 Index was up about 30%.

MoffettNathanson principal and senior analyst Craig Moffett was also cautious about the future. While he did not expect a major correction in 2014, mainly because cable valuations are in line with the rest of the market — estimated by some to be about 6.5 times 2014 core cable cash flow — he also did not expect another period of big gains for the sector.

“Unlike just a few years ago, when everyone hated cable stocks, the sector is now relatively well-loved, and that makes it much harder to see where the incremental buyer of these stocks is going to come from,” Moffett said.

But the analyst also feared that the deal frenzy could cloud investor judgment in the long term.

“There are reasons to be a bit more cautious than in prior years,” Moffett said. “My fear is that investors have lost sight of fundamentals in the chase for M&A.”

Pivotal Research Group principal and senior media and communications analyst Jeff Wlodarczak also was optimistic about the coming year, mainly because he sees organic growth in the sector as more and more MSOs go all-digital.

“While you could see a pullback in TWC if a deal does not happen, I see a good year for cable in 2014,” Wlodarczak said. “Cable has pricing power in data, many operators (Charter and increasingly TWC) are just starting to see the benefits of going all-digital, business is a huge opportunity with a long runway growth, advertising should be a nice contributor in 2014 and operators are throwing off a good amount of free cash flow and deploying that into aggressive capital returns.”

ISI Group analysts Vijay Jayant and David Joyce also noted the benefits of going all-digital, adding that it has helped Comcast roll out new services quicker and reduce churn.

SATELLITE UPTICK

Satellite stocks were also up about 41% for the year, with DirecTV up 32.6% to $66.39 from $50.16 and Dish Network climbing more than 50% to $55.29 per share from $36.40 as investors guessed what chairman Charlie Ergen could do with the $3 billion in wireless spectrum he has amassed for the past several years.

“For, Dish it is all about the spectrum value he [Ergen] is building and the U.S. business being more resilient than people think, while at DirecTV it is [about] the Latin American turnaround,” Wlodarczak said.

 

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April