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'Stable’ Cable Should Weather the Recession

Wachovia Securities analyst Marci Ryvicker initiated coverage of the cable sector with a “market weight” rating, adding that while the industry does tend to be defensive in a recession, it doesn’t usually outperform in a recovery.

Ryvicker, who also covers the broadcast sector, said in a research note that although cable’s stable business model has led to positive growth through the recession so far, “tremendous uncertainty exists regarding how this business model will have to evolve in order to stave off competition and remain relevant to consumers, whose spending habits have permanently changed, in our view,” Ryvicker wrote.

The analyst also worried about the industry’s ability to withstand “cord-cutting,” a depressed housing market that will further affect subscriber losses, and a wireless-broadband strategy that the market believes has already failed.

“It is difficult for us to get excited about low-single-digit revenue and EBITDA growth, though we like the higher free cash flow that comes with slowing fundamentals,” Ryvicker wrote. “We hate to be boring, but we do not see a near-term catalyst for the cable stocks other than a potentially compelling valuation, which, in this environment, is not uncommon.”

Ryvicker noted that while cable has weathered the last several recessions, mainly because TV is the last expense that consumers cut in a downturn, they haven’t outperformed the market during a recovery, mostly because of their lower leverage and more consistent business model.

“Cable may have an even harder time in this recovery (whenever that may be) given the intense competition from the regional Bell operating companies, aggravated by likely long-term changes in both the housing market (directly correlated with subscriber gains) and consumer discretionary spending (directly linked to demand for advanced services),” Ryvicker wrote.

But the analyst gave the industry a little wiggle room for improvement.

“Where could we be wrong?” Ryvicker asked. “On the positive side, [Verizon Communications] and [AT&T] may prove to be more rational players than we give them credit for (in terms of pricing); WiMax may be the wireless broadband application of choice; and/or cable may successfully partner with the Internet in providing online content. On the negative side, cable could lose more subscribers than is currently anticipated; cord cutting in video/telephony may increase; and/or free cash flow growth could slow due to higher capex.”