Comcast Corp. and Time Warner Cable Inc. (TWC:US) have soared to the top of S&P 500 media index this year, defying predictions of cable’s downfall, thanks in part to one big selling point: They don’t do business in Europe.
The two largest U.S. cable companies appeal to investors who want to avoid the fallout from Europe’s debt crisis and currency fluctuations, said Craig Moffett, an analyst at Sanford C. Bernstein & Co. Comcast has gained 44 percent this year and Time Warner Cable shares have climbed 41 percent, outpacing their media peers (CMCSA:US) and the S&P 500, which is up 13 percent.
The gains don’t indicate anything specifically about the cable industry, Moffett said. Portfolio managers want U.S. cable providers as protection against Europe and Latin America, and that outweighs the specific challenges that the companies face, such as the risk that customers may switch to satellite services or Netflix Inc. The sentiment has been a boon to the stocks and other peers, such as Charter Communications Inc. (CHTR:US), the fourth- largest U.S. cable company, which has gained 38 percent in 2012.
“Investors are piling into cable as reasonably defensive names that have no exposure to Europe and foreign currency,” said Moffett, who is based in New York. “None of that has any connection to the business itself. Pricing power, Netflix and cord cutting don’t even come up in the conversation.”
Shares of Philadelphia-based Comcast (CMCSA:US) were little changed in today’s trading, closing at $34.14. Time Warner Cable, based in New York, was little changed as well, at $89.55. Another company with no European exposure -- Scripps Network Interactive, a Cincinnati, Ohio-based owner of U.S. cable channels such as HGTV and the Food Network -- ranks third on the S&P 500 media index (S5MEDA) this year.
Cable critics point to years of cable-TV customer losses and falling video margins as signs of the industry’s decline. Comcast has reported losses in total video subscribers for 21 consecutive quarters. And programming fees -- the money companies such as Walt Disney Co. (DIS:US) and Viacom Inc. (VIAB:US) charge pay-TV providers to carry their channels -- are increasing at a faster rate than what cable companies can pass on to customers.
The video losses suggest some customers are cutting the cord on cable altogether, opting instead to watch video with online services such as Netflix, Hulu LLC and Google Inc.’s YouTube. The evidence is mixed, as some of the cable losses can be explained by customers switching to other pay-TV services, including AT&T Inc. (T:US)’s U-verse and Verizon Communications Inc. (VZ:US)’s FiOS. Moffett and other analysts, such as Barclays Capital Inc.’s James Ratcliffe, point to weak construction of new homes as another explanation for losses.
“Fundamentally, we continue to view the business as stable, with video a largely zero-sum business,” Ratcliffe wrote in a note to clients last week.
Stability, rather than soaring growth, may be enough to persuade investors to buy, Moffett said. Comcast and Time Warner Cable’s lack of international revenue has shielded them from the euro’s 14 percent decline and the Brazilian real’s 21 percent fall against the dollar over the past 12 months. Having no foreign exposure makes U.S. cable a safe bet for investor managers looking to build a hedged portfolio, Moffett said.
Deals for smaller private cable operators have also lifted cable stocks because they’re being completed at higher earnings multiples than larger companies command, Mario Gabelli, chief executive officer of Gamco Investors Inc., said in an interview.
Last month, Cogeco Cable Inc. (CCA) paid 8.3 times Atlantic Broadband’s estimated annual earnings before interest, taxes, depreciation and amortization. Atlantic is the 14th-largest U.S. cable provider, according to the company’s website. Later that day, a group including BC Partners, CPP Investment Board and CEO Jerry Kent agreed to purchase Suddenlink Communications, the seventh-largest U.S. cable company, at 8.5 times estimated Ebitda, according to data compiled by Bloomberg Industries.
Even after this year’s stock surges, Comcast is valued at about 7 times next year’s estimated Ebitda and Time Warner Cable trades at about 6.4 times. That’s a sign public investors aren’t seeing the same value in cable as the private market, Gabelli said.
Consistent dividend growth and share buybacks are the other essential pieces to cable’s rise this year, Moffett said. Comcast raised its quarterly dividend 44 percent (CMCSA:US) this year to 16.25 cents a share. Time Warner Cable increased its payment 17 percent to 56 cents a share. Time Warner Cable announced a $4 billion share buyback plan in January, followed by Comcast’s authorization of a $6.5 billion repurchase plan in February.
“Cable stocks screen well,” Moffett said. “Rapid dividend growth, no European exposure and consistent stock buybacks. It’s just the right profile at just the right time.”
D’Arcy Rudnay, a Comcast spokeswoman, declined to comment. Alex Dudley, a spokesman for Time Warner Cable, disputed the notion that his company’s stock is popular because of the European crisis.
“We find it hard to believe that generating very strong free cash flow and returning the vast majority of that to shareholders will ever go out of style,” he said.
New approaches to Internet pricing also have bolstered the stocks, Gabelli said. Both cable companies are moving toward charging consumers by how much bandwidth they use. Time Warner Cable debuted an optional consumption-based billing plan for light users in March, and Comcast abandoned data caps in favor of charging for when customers go over 300 gigabytes a month.
“Cable companies are migrating to measured pricing, a new way to make money,” said Gabelli, whose funds own about 430,000 Time Warner Cable shares and about 15 million shares of Cablevision Systems Corp. (CVC:US), the fifth-largest U.S. cable company. “The whole world wants to get speedier broadband.”
While cable has struggled to gain TV subscribers, the industry has been dominant in picking up Internet customers. Comcast and Time Warner Cable have netted a combined 3.27 million broadband subscribers over the past eight quarters.
“There’s no question that there is a bias toward large-cap American companies that don’t have European exposure, but it’s good cash flow, buying back stock, broadband and good management,” Gabelli said. “That’s the story.”
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