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Cable-TV's Picture Gets a Little Shakier

By Howard Choe With a number of factors putting pressure on the cable-TV industry, Standard & Poor's is taking a less aggressive stance on the shares of system operators. As part of our more cautious position, we downgraded our investment opinions on the shares of three major industry players on June 10. We lowered Comcast (CMCSK) to 3 STARS (hold) from 5 STARS (buy). And we also cut Cablevision (CVC) and Charter Communications (CHTR) to 3 STARS from 4 STARS (accumulate).

A laundry list of near-term concerns has scared investors away from cable stocks. Most of the fear is tied to accounting and high debt concerns related to Enron, Tyco, and, most significantly, industry member Adelphia. These days, investors also want to see earnings and free cash flow -- which these outfits lack due to high debt levels and large capital-expenditure requirements.

In terms of revenue and profit growth (as measured by earnings before interest, taxes, depreciation, and amortization, or EBITDA), the industry is faring well, with low- to midteen growth driven by increased subscriptions to high-speed data (Internet) and digital cable. As basic subscriber growth has slowed to less than 1%, however, the industry will become more dependent on ancillary services such as digital cable, high-speed data, video-on-demand, telephony, and interactive TV.

NEW SERVICES. With the rate of consumer acceptance unknown for some of these new products, investors are starting to question the assumptions behind stock valuations. While we at S&P retain a favorable view of the cable industry in the long term, we believe the group needs more catalysts in the near term to counter negative investor sentiment.

What will help turn things around? Cable shares should benefit from a more favorable view of growth stocks as the economic recovery takes hold, as investors become both more risk-tolerant and willing to take a longer-term view.

With respect to the industry, cable companies should benefit from a slowing decline in basic and digital subscriber growth and favorable acceptance of new services such as video-on-demand and telephony. The second quarter is a typically slow time for cable outfits, so the next six months should tell if the industry can stage a decent recovery against an improving economic backdrop. Analyst Choe follows cable-TV stocks for Standard & Poor's

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