Is the sun once again shining on the cable sector?
With multiple system operators set to release third-quarter results, beginning with Comcast and Cox Communications on Wednesday, Wall Street analysts are predicting that the cable sector, after a difficult second quarter, could again attract the affections of investors.
For the better part of 2004 cable stocks have foundered as investors steered away from the sector, worried that competition from satellite operators and telephone companies was eroding the long-term growth prospects of cable operators. More recently, the cable sector has been battered by headlines about the Regional Bell Operating Companies rolling out fiber-optic wiring to homes to deliver video, and by the threat utility companies pose with their planned introduction of broadband services delivered over power lines.
Comcast shares are down around 14 percent since the start of the year, while Cablevision shares have fallen more than 15 percent. Shares in Cox are about even with where they started the year, but that can be attributed to a plan by Cox’s majority shareholder to take the cable company private later this year. Before the July announcement that Cox would go private, its shares were down 20 percent from where they were at the beginning of the year.
Things were particularly rough in the second quarter, after several cable operators reported steeper-than-expected subscriber losses in the face of sharp subscriber gains at satellite operators DirecTV Group and EchoStar Communications. To be sure, the second quarter, when college students and snowbirds disconnect their service for the summer, has long been a weak period for most cable companies. However, the 2004 second quarter was further hurt by satellite’s luring away of cable customers.
The third quarter could be a different story. Thanks to a combination of seasonal effects and a real push by cable operators to more effectively compete with satellite, many analysts believe cable will post strong cash flow and revenue growth and could report robust subscriber numbers in the high-speed data and cable-based telephony businesses.
The third quarter is typically a stronger one for the cable companies because the snowbirds and college students who disconnected in the second quarter reconnect their service.
However, with satellite operators continuing to focus on subscriber growth, new customer growth in the basic video arena could remain weak, some analysts said.
Comcast Looks Solid
Comcast could have a particularly strong quarter, driven by strong growth in its high-speed data business, said Bernstein Research cable analyst Craig Moffett. He estimates the No. 1 cable company could report as many as 475,000 new high-speed data customers, fueled by an expanded number of markets that now have the service since the company upgraded most of its cable plant.
Another wild card could be telephony. Time Warner is particularly well positioned to reap the benefits of its rollout of voice-over-Internet protocol telephone service. The company said it plans to have virtually every market ready for VoIP by the end of October. Time Warner could add as many as 150,000 VoIP customers by the end of the year, according to an estimate by Merrill Lynch media analyst Jessica Reif Cohen.
But the growth could have a cost for Time Warner. Ms. Cohen noted that Time Warner is likely to spend $25 million a quarter in costs associated with the VoIP launch, which could in turn eat into the cable unit’s cash flow.