Cable's Fall Season

"Fall" is the perfect name for cable's autumn season this year. Not only have the leaves dropped to the floor, so have cable stocks.

In the three months since September 7, Comcast Corp. (Nasdaq: CMCSA, CMCSK) shares slipped 26.9 percent. Time Warner Cable Inc. (NYSE: TWC) is down 26.1 percent. Cablevision Systems Corp. (NYSE: CVC) fell 24.5 percent, while Charter Communications Inc. stock has plummeted 48.4 percent. That's as much red as Vermont's autumn maple leafs.

And because hard-pressed MSOs are quick to squeeze their vendors, cable equipment suppliers have suffered, too.

Arris Group Inc. (Nasdaq: ARRS) shares slid 25.5 percent, while beleaguered BigBand Networks Inc. (Nasdaq: BBND)'s stock spiraled downward 45 percent. CommScope Inc. looks downright upbeat with a share decline of 16.7 percent, about half the loss of Vyyo Inc. (Nasdaq: VYYO), at 32 percent. It's getting a bit chilly heading into winter.

Table 1: Cable's Fall Season � MSOs
MSO Stock price � Sept. 7 Stock price � Dec. 7 Change ($) Change (%)
Cablevision $33.95 $25.64 -$8.31 -24.5%
Comcast $25.00 $18.28 -$6.72 -26.9%
Charter $2.73 $1.41 -$1.32 -48.4%
Time Warner Cable $35.37 $26.13 -$9.24 -26.1%
Source: Public stock information

Table 2: Cable's Fall Season � Vendors
Vendor Stock price � Sept. 7 Stock price � Dec. 7 Change ($) Change (%)
Arris $14.11 $10.51 -$3.60 -25.5%
BigBand $9.99 $5.49 -$4.50 -45.0%
Commscope $56.66 $47.22 -$9.44 -16.7%
Vyyo $5.75 $3.91 -$1.84 -32.0%
Source: Public stock information

Given the hemorrhaging in the cable sector, you might think that MSOs and their suppliers were investors in subprime mortgages.

Alas, no. Cable operators are simply selling bundles of entertainment, Internet, and communications services. Facing a challenging macroeconomic environment and the specter of competition, MSOs like Comcast have been forced to modestly trim back rosy growth projections for the year. (See It's the Economy, Stupid! )

In Comcast's case, the MSO shared on December 4 that its revenue generating units would take in about 8 percent less than anticipated for the year, but still 20 percent more than the previous year. (See Comcast Lowers RGU Guidance.)

Projected revenue growth for the year was trimmed from 12 percent to 11 percent, and operating cashflow growth was clipped from 14 percent to 13 percent. While the business won't grow as much as expected, we're not exactly looking at a house on fire – even with Comcast's admission that its capital expenditures will be 5 percent higher than expected this year.

What we are witnessing, once again, is Wall Street's schizophrenic relationship with the cable industry. Cablevision's controlling family, the Dolans, clearly had enough of it and worked overtime to take the company private. Ironically, on October 24, Cablevision shareholders rejected the $36.26 per share, arguing it insufficiently valued the business. (See Cablevision Shareholders Reject Dolan Bid.)

As of December 7, the Dolan's "insufficient" offer was 42 percent higher than Cablevision's share price. So which is it, Wall Street? Is cable over- or under-valued?

Cable investors seem incapable of deciding. No wonder the Dolans wanted to get off this crazy carousel. Going private seems to be treating Cox Communications Inc. quite well. (See Private Dancer .)

Maybe Cablevision's ruling family will finally get its wish, too. (See Dolan-ing Out the Dough.)

Interestingly, telcos have weathered the fall far better than cable. AT&T Inc. (NYSE: T)'s share price is flat over the past three months, while Verizon Communications Inc. (NYSE: VZ)'s stock has actually climbed 9 percent. It is odd, considering MSOs are still adding telephone and broadband Internet customers hand over fist, and telcos are spending billions to upgrade their networks to add video to stem cable's onslaught.

Additionally, today's tough economic conditions may improve cable competitive positioning. Consumers may switch more eagerly to value-priced cable phone service in order to save dough. At the same time, telcos cannot afford to discount video as aggressively as cable can with phone, given the Bells' heavy capital spending and the higher prices they pay for programming.

After a frigid fall, cable is hoping for a warmer winter – and that the bears head into hibernation.

— Michael Harris, Chief Analyst, Cable Digital News

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