A Boost from Two Cable Giants


By Ronald Grover The TV world loves a good story. And that's what the cable-TV industry's two largest players, Comcast (CMCSA) and Time Warner (TWX) are expected to deliver when each releases second-quarter earnings on July 28. In both cases, analysts expect profits to rise substantially vs. a year ago. And Time Warner is expected to have a pleasant surprise from its long-suffering AOL unit, which is likely to show a double-digit hike in online ad revenue, to about $200 million.

The two media giants' earnings couldn't be better news for an entertainment and media industry that remains sluggish. According to investment bank Houlihan Lokey Howard & Zukin, stock performance by large U.S. media conglomerates are off by 6.8% in the last three months and 2.1% for the year. Cable operators have also been whacked, in part by Comcast's ill-fated hostile bid to buy Disney (DIS). Many investors saw the move as a lack of faith by Comcast management in its core cable-TV business, and that in turn has hurt the entire sector.

Moreover, cable companies face "continued and potentially increasing competitive threats from satellite operators and telephone companies," writes UBS Investment's Aryeh B. Bourkhoff, a leading cable analyst. Nevertheless, Bourkhoff continues to recommend cable stocks Comcast, Cablevision (CVC), and Cox (COX), which he says are "trading at a substantial discount to their respective intrinsic value."

A RUSH TO DATA. That certainly looks true of Comcast, which is Bourkhoff's top pick. He expects it to report solid results for the second quarter -- not a traditionally strong period for cable operators. He figures that cable revenue will increase by 9.5% over last year, with earnings before taxes, interest, depreciation, taxes, and amortization (EBIDTA) increasing by 16.7%, to $1.86 billion.

Although Comcast is still expected to lose as many as 3,000 basic-cable subscribers to satellite, Bourkhoff figures it will add more than 343,000 data customers, who pay an average of $41.67 each month for their data service, about the same that most Comcast customers pay for cable. Comcast is also expected to benefit in the quarter by reducing its capital spending to $814 million from about $1 billion a year ago, as it finishes rebuilding its systems to offer phone service, data, and video-on-demand. It's the cable industry's largest single operator, with more than 21.5 million subscribers.

According to industry sources, Comcast may also give its shares an even bigger kick by announcing that it intends to buy back as much as $500 million worth of stock, the second phase of a $1 billion stock-buyback program that begin last year. Comcast isn't commenting, however, ahead of its conference call. Now trading at $28.39 a share, Comcast is projected to rise to $37 a share within 12 months, according to a consensus assembled by Yahoo! of 25 analysts who follow the cable company.

BIGGER VOD LIBRARY. Those analysts expect Comcast to report earnings of 10 cents a share this quarter, compared to a loss about 2 cents a share a year ago. Merrill Lynch analyst Jessica Reif Cohen recently raised her estimated second-quarter cable projections from $4.78 billion to $4.795 billion, in large part due to the 302,000 high-speed data customers she figures Comcast will add, plus the expansion of its video-on-demand library.

Improved offerings have helped increase the number of its digital subscribers by 15%, to nearly 7 million -- about one-third of its customer base. She figures these customers will each pay $50.15 a month, a 6% hike over last year. Earnings for Comcast's programming assets, which include stakes in the E! Entertainment Channel and ownership of the Golf Channel, is expected to increase by 38%, to $69 million in the quarter.

For Time Warner, its new respect on Wall Street is likely to come outside its cable arena. CIBC World Markets analyst Michael E. Gallant writes that "the profit outlook for nearly all of Time Warner's non-cable services operations is improving faster than most appreciate right now." He figures the company will post a 10% earnings hike, to $10.6 billion, up 9% from a year earlier, in large part because of a strong showing at the Warner Bros. film studio.

Driven by home-video releases of Matrix Revolutions and Lord of the Rings: The Return of the King, and by the good showing of Scooby Doo 2 at the box office, the film unit's revenues are expected to increase by 42%, to $3.4 billion, says Gallant. That has prompted the analyst to hike his prior estimates of the studio's earnings by 14%, to $515 million, vs. his prior estimate of $414 million.

ONLINE SURPRISE. Time Warner's cable unit is expected to show solid, if somewhat less spectacular growth than the film studio, with cable revenue growing at 9%, according to Reif Cohen. That's slightly lower than her earlier projections, in large part due to softer-than-anticipated ad revenue. She still predicts a 9% hike in subscription revenue, to nearly $2 billion. That's because Time Warner continues to add digital subscribers, though she expects the rate to be somewhat slower than a year ago. She also sees slower growth in adding data subscribers among residential customers and a slight uptick in commercial data users.

The big surprise for Time Warner is likely to be at its AOL unit, long the media behemoth's struggling stepchild. Some analysts, including CIBC's Gallant, figure that the full-year guidance Time Warner had offered now looks conservative, despite a likely decline in the service's 23.3 million users. Subscriber losses will probably be offset by an increase in ad revenue. Gallant forecasts that after 10 straight quarterly declines, online ad sales at AOL will rise by 22%, to about $218 million.

The service still has to work off $47 million in "legacy contracts" that it wrote at low rates, he says, but analysts generally figure that AOL's new search partnership with Google will help it energize sales in the future.

HAPPY TWIST. The imponderable for Time Warner, however, is whether it'll make any acquisition going forward. It's said to be the lead candidate to buy the MGM (MGM) studio for about $5 billion in stock, which could depress Time Warner's stock, now trading at $16.91. The 24 analysts who follow Time Warner project a 12-month stock-price target of $20.88, according to Yahoo!.

Time Warner is also among the cable companies reported to be looking to buy all or part of bankrupt cable company Adelphia Communications, the first step in what analysts figure is a spin-off of its cable operations to shareholders. No matter what it or cable competitor Comcast do down the road, their current results ought to provide the kind of plot twist that will make the industry applaud. Grover is BusinessWeek's Los Angeles bureau chief


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