Recession Confessions Inside Outlook

Hindsight may be 20/20, but when it comes to the cable
industry, a stroll down memory lane can provide perspective that may often
get lost in the shuffle of the day’s news. And if ever there were a market
segment that could be considered “news-driven,” cable is it.

The industry has a long history of its share prices being driven not necessarily
by fundamental growth — or a lack of it — but by perceptions and short-term
metrics. A 50,000-foot view can bring some surprising perspectives, perhaps the most
telling being that cable companies, and in particular their stocks, have shown incredible
resiliency through some pretty difficult economic times.

With the latest earnings season upon us — Time Warner Cable is scheduled to report
first-quarter results on April 28 and the rest of the sector will report during the first few
weeks in May — Multichannel News took a look at six top cable stocks and tracked them
over the past five years, through tough times (the Great Recession, subscriber losses and
competitive threats) and good times (domination of the broadband market, entries into
commercial telephony, the explosion in video-on-demand choices and DVRs).

Since April 2006, five of those six stocks have all gained substantially — led by Th e
Walt Disney Co., up 58%, and Comcast, up 34% — and blew away the Standard & Poor’s
500, which was essentially flat over the five-year period. While a year later the climate
was very different — move the benchmark date up to April 19, 2007, and half of the cable
stocks declined over the period — all of the sector except Time Warner Inc. (down
15.5% during that stretch) outperformed the S&P, which was down 10.8% between April
19, 2007, and April 19, 2011. So, no matter how you slice it, cable stocks have done well.

Despite that performance, the stocks still get little love from Wall Street. Trading multiples
for the major MSOs range from 6-to-7 times forward-looking cash flow, well below
the 8 to 10 times multiples of recent private deals. Those poor valuations were one reason
two MSOs (Insight Communications and Mediacom Communications) have gone
private in the past five years. Cable networks, with their dual revenue streams (affiliate
fees and ad sales), have fared better, with multiples ranging from 9-to-11 times forwardlooking
cash flow. That could improve as the advertising market continues its rebound
— media agency Magna Global has predicted that cable ad revenue could climb 10.8%
in 2011, making it one of the fastest growing media sectors.


Analysts are generally optimistic about the first quarter for
cable operators, expecting that the momentum of the fourth quarter — where, at least
for Comcast, basic subscriber losses were less than expected — will continue. Financial
metrics should remain healthy; most analysts see revenue growth in the 5% range,
cash-flow growth in the 4%-to-5% range and average monthly revenue per unit (ARPU)
to rise about 8%.

On the network side, domestic advertising sales should continue their upward trajectory
— for Disney, Time Warner Inc. and Viacom, domestic ad sales were up an average of
about 10% in 2010. A strong upfront and a robust scatter market should help drive growth.

And while the economy seems to be chugging along — the national unemployment
rate of 8.8% in March was its lowest in two years, and February home sales were up 3.3%
over January — there is still some concern that things could take a turn for the worse.

Wunderlich Securities media analyst Matt Harrigan, who is generally bullish on the sector,
said he expected a good upfront market but was still wary about the overall economy.

“Continued leverage in the system could tip the economy fast,” Harrigan said.
Citadel Securities media analyst Vijay Jayant was bullish on commercial services opportunities
for cable operators. He expects commercial revenue to rise more than 20% for
the full year for the sector. During the first quarter, Jayant is particularly bullish on Cablevision.
He expects revenue will rise 10.5% and operating cash flow will increase 15.5%,
mainly because of the addition of Bresnan Communications, which the MSO purchased
last year for $1.365 billion.

For Comcast and Time Warner Cable, Jayant is predicting relatively modest revenue
increases (2.1% and 3.5%, respectively) and cash-flow growth (5.2% and 3.7%) in the period.
The analyst also sees a deceleration in the number of basic subscribers each MSO
is expected to lose — he predicts Comcast will shed 74,000 basic- video customers in the
period (compared to 82,000 in Q1 2010); Time Warner Cable to lose about 34,000 basic
subscribers (vs. 42,000 in Q1 2010) and Cablevision to drop about 2,000 basic customers
(compared to an increase of 900 customers in Q1 2010).

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