Markets & Finance

Time to Tune In to Broadcasting Stocks


By Howard Choe The nation's cable TV and broadcasting industries got hit with an advertising spending drought in 2001: gone are the high levels of dot-com advertising. And the twin spectacles of the Summer Olympics and Presidential elections won't be around to boost networks' profits. The road to recovery is looking firmer, however, and the radio and television group faces easier earnings comparisons during the second half -- as well as lower interest rates and a more favorable deregulatory climate.

Television and radio broadcasting stocks have advanced this year in anticipation of an economic recovery. While there are no significant signs of a rebound yet, companies will face lower earnings expectations in the second half and into 2002, which should provide support for the stocks. A clearer picture of the advertising market will emerge in mid-summer and provide better discretion for the group. Television advertising revenues are expected to decline 5%-7% in 2001, following an estimated 13.6% gain in 2000, according to Standard & Poor's. In radio, S&P expects an advance of 1%-2% in 2001, versus an estimated 12% gain in 2000.

In the more intermediate term, radio and television advertising will benefit from more one-time media events and an explosion in new technologies and services. Brand building among Internet and interactive TV companies is fueling growth, as these advertisers must reach large audiences quickly to establish their businesses. Broadcasters will need to generate more hit programs, like "Survivor" and "Who Wants to Be a Millionaire," in order to attract top dollar from advertisers. Otherwise, ad sales will become increasingly competitive, as rising inventories on the spot market induce a buyers' market. Competition is already increasing from the cable industry, which can offer a more targeted audience.

Unlike broadcast television stations, cable system operators derive most of their revenues from monthly subscriber fees. The roll out of digital cable and high-speed internet services services should help the industry accelerate its cash flow growth and improve its stock over the next few years. The industry has started deploying digital service in various markets and expects the market to be fully digitalized by the end of 2002. Even with the economic downturn, cable subscriptions continue to grow roughly 2% per year on average, and the industry is expected raise prices only moderately, with rate hikes on basic cable likely to average 4% to 5%. Also, the overturning of the Federal Communication Commission's ownership cap rule, which limits any single entity that owns cable operators to 30% of the national audience, should spur industry consolidation.

But cable has a fierce competitor -- direct broadcast satellite (DBS) service, a group that has been experiencing solid growth and remains a viable challenge to cable in certain regions of the country. DBS has experienced tremendous growth in the past few years: as of early 2001, the industry had about 14 million subscribers. Standard & Poor's estimates that around 3.3 million new subscribers were added in 2000 and another 3.1 million will sign on in 2001.

S&P is positive on the radio and television group, due to improving fundamentals. Year to date through July 20, the S&P Broadcasting (Television, Radio & Cable) Index gained 1.8% versus a 7.5% decline for the S&P 1500. In 2000, this industry index fell 29.1%, versus an 8% decline for the S&P 1500.

Best bets in the group? S&P has a 5 STARS (buy) recommendation on cable operator Comcast (CMCSK) and radio and television station owner Clear Channel Communications (CCU).

S&P has a 4 STARS (accumulate) opinion on New York-based cable operator Cablevision (CVC). Howard Choe is a broadcast analyst for Standard & Poor's


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