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Cable stocks plummet

Adelphia Communications Chairman John Rigas hasn't cost only his family hundreds of millions of dollars in recent weeks. He has helped drag the fortunes of his cable pals down with him.

The scandal at Coudersport, Pa.-based Adelphia has trashed other cable stocks, leaving some at their lowest point in years. Cable stocks are off 25% to 35% since Adelphia disclosed its problems five weeks ago, and, while the companies seem to have bottomed for a while, there's no sign of a turnaround in sight.

Adelphia-induced fear about the rest of the sector isn't cable operators' only problem and perhaps isn't even their biggest problem. Investors are extremely anxious about the slowing growth of digital cable, seeing high churn and slowing connections. With basic-subscriber growth at a mere 1%, operators are counting heavily on digital cable for revenue growth.

"If you were looking for 50% penetration, it's not going to happen," said Sanford Bernstein & Co. media analyst Tom Wolzien, who expects operators to stall out around 30%—the same level as plain-old pay channels like HBO. He blames weak programming packages with pale clones of established nets like Discovery and A&E. "Until you see some great product that people want, it's not going higher."

Since Adelphia was first challenged about co-signing what are essentially margin loans for the Rigases to buy Adelphia stock, Cablevision Systems has dropped 33%, costing Chairman Charles Dolan $275 million; Comcast has dropped 23%, a $235 million loss for the controlling Roberts clan; Charter has fallen 35%, a $1.5 billion drop for Paul Allen.

Morgan Stanley media analyst Richard Bilotti says cable stocks are trading around 12.6 times annual cash flow. A year ago, they were more than 17 times cash flow.

The Rigases, of course, have cost themselves more than $1 billion as Adelphia's shares have dropped from $25 per share to just $5.50 last Friday. Their Adelphia stock was worth $1.5 billion in March, now it's worth $300 million. Also, it appears that they borrowed $800 million to finance stock purchases last fall. It's not clear how much other debt the Rigases have against their other shares, but the family and its various holding companies are likely to be at least $300 million under water.

The good news is that even Adelphia's operating fundamentals aren't all that bad. While other media companies are posting sharp declines in ad revenues and earnings, cable companies have maintained their growth. Yes, AOL Time Warner last week posted the expected $54 billion loss, and its core America Online service is a mess, but Time Warner Cable logged 19% revenue growth and 10% cash-flow growth for the first quarter ended March 31.

Cox Communications posted 17% revenue growth and 12% cash-flow growth, although its profit margins are dipping.

AT&T Broadband is the exception. The company lost 180,000 basic subscribers during the quarter. But, after last year's weak show, revenue increased 14%; cash flow jumped 64%.

No trigger for a turnaround is in sight. But Bear Stearns media analyst Ray Katz says the fundamentals are good "and, ultimately, fundamentals rule."