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Cable Stock Spurt Thrills Wall Street

First-quarter earnings posted by Time Warner Cable and Comcast last week proved robust, surprising Wall Street. The companies maintained their grip on cable TV subscribers amid furious competition from telcos' video products. In a separate trend, ad-supported cable networks continued to ride high due to a strong scatter advertising market.

As cable maintains its subscriber base, the two satellite TV outfits face tough times, particularly as housing industry woes crimp new household growth. "How much pie is left for DBS?" asked a Bernstein Research report released last week.

In earnings Wednesday, Time Warner Cable, which is the nation's second largest cable system operator, reported a 55,000 net gain in cable subscribers for the quarter ended March 31, pleasantly surprising stock analysts who had projected a decline. The next day the largest cabler Comcast said its cable headcount loss was far less than expected at 57,000 households.

Even slowing cable sub shrinkage, as Comcast did, is considered a big positive because cable companies are extracting more total revenue per subscriber with digital video recorders, voice, broadband and others add-on services. Comcast average revenue per basic subscribers hit $107 per month in the quarter, up from $96 one year earlier and $87 two years ago.

"Cable operators reported having marketed [to consumers] much more aggressively during the first quarter," notes Bernstein Research. "This increased marketing may well have improved their subscriber retention results." Comcast told investors it increased marketing expenditures by a sizeable 20% in the quarter, promoting its high definition offer, tailoring ad messages for specific geographies and also targeting specific competitors by geography.

Cable system stocks, which have been in the doldrums since early 2007, perked up on the week's earnings news. "Market share gains, financial outperformance and quickly-shifting investor sentiment in favor of cable have sparked a rally in Comcast shares, driving them 10% higher over the past two days," Merrill Lynch noted in a report Friday. Another component in the cable stock rally is headcount gains in broadband, which is a high-profit service.

Despite that good news for cable systems, Time Warner Inc. confirmed last week it will separate itself from its 84%-owned Time Warner Cable, as new chairman Jeff Bewkes streamlines the entertainment media conglomerate by focusing more on content and distribution than on cable TV "pipes." But the parent of the Turner cable networks and Warner Bros. Pictures provided few details of the separation, which disappointed analysts.

However, cable network earnings at Time Warner and Viacom warmed Wall Street. Viacom president and CEO Philippe Dauman said on an investors' conference call that national advertising, which was strong in the first quarter, "is still holding up." Operating income in Viacom's media networks segment climbed a healthy 15% in the quarter.

Both Time Warner and Viacom said their investments in original programming for their basic cable networks are paying off so they intend to keep spending.