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Will Stocks of Cable Ever Be Stable?

When NCTA president Kyle McSlarrow was asked about education efforts for the coming digital transition, he replied: “It's a simple message, but it is impossible to convey in a 30-second spot.”

He may as well have been talking about cable stocks. I'm glad I'm not allowed to own any, nor would I want to, because they're heartbreakers. For many, following cable stocks has been like riding a roller coaster, and they are almost inscrutable given their relatively unusual and ever-changing metrics. By one measure, cable stocks were down 28% last year, up 40% in 2006, down 10% in 2005 and down 8% in 2004.

I was long ago convinced that big broadband profits were the cable industry's to lose. The hybrid fiber-coax that the cable industry is now exploiting to deliver digital voice, video and data is one of the most sophisticated in the world. It's devilishly simple — all these services from a single pipe — or is it?

“It's tough being a cable bull these days,” Chris Marangi of Gabelli & Co., told B&C, our sister publication, last fall. “I've never seen sentiment shift so violently, so quickly against the sector.” Like many analysts, he's been frustrated by cable stocks that he says do not reflect their true growth.

That up-and-down stock price makes it hard for cable operators to do many things, like borrow money or even buy back their own stock, as evidenced in this week's cover story. Moreover, it was that volatility that forced Cox Communications and Insight Communications to go private — and they are better off, by the way. And it's why the Dolans of Cablevision Systems have tried three times to say “ciao” to the public markets.

You can't blame investors for being a little skittish. Few industries are buffeted by so many forces as the cable industry, and few weather such dynamic change in core businesses. At any given moment, even when the fundamentals are solid, cable stocks can dive over new regulation, a deal breakdown or even slight subscriber losses — all warning signs of some phantom doom.

The once simple cable-TV business has evolved into three different industries — TV, phone and data — which complicates its value to investors.

Even the metrics for measuring cable companies' success has changed. While most companies on Wall Street are measured by standard metrics, like net income or profit, cable companies had to educate new investors about cash flow, and even that metric has morphed to “free cash flow” and other measures.

Aryeh Bourkoff, vice chairman of Technology, Media and Telecoms (TMT) Investment Banking, who has been a debt analyst, an equity analyst and an investment banker, says that every year cable operators are faced with a “wall of worry” from investors, despite displaying strong growth in core services. “The cable sector is always restless,” he said.

But like many analysts, he's confident the cable industry is poised to stave of FiOS and other competitors, that it will add new services and that it's a growth business … for now.