Anyone who has watched Operation Iraqi Freedom unfold from their living room knows it: Cable TV is hot. Better yet, with the accounting scandals at cable operators Adelphia Communications and Charter Communications (CHTR ) largely behind it, the industry is no longer making bad news. The result is that this year, cable stocks have been among the stronger performers in the media sector.
The hot streak is likely to continue. After nearly a decade of spending billions to upgrade with superfast fiber-optic cable, cable operators will see as much as 20% revenue growth this year by using their wires to sell more phone service and introduce digital TV, says UBS Warburg analyst Aryeh Bourkoff.
Ann Miletti, co-manager of Strong Capital Management's stock and opportunity funds, likes cable operator Comcast Communications' ability to generate hefty increases from the poorly run AT&T (T ) cable unit it bought last year. Cox Communications (COX ) cable's leading provider of phone service, is best-positioned to take market share from the telecoms while signing up new customers in Phoenix and Orange County, Calif., she says.
Cablevision Systems' potential to tap free-spending customers in the New York metropolitan area lured S. Basu Mullick, a portfolio manager at Neuberger Berman Partners Fund, to the stock. Beaten down by heavy debt, Cablevision rebounded 34% this year by announcing sales of its theater and retailing assets. Still, at $22.55 a share, Mullick figures its customers are valued at $2,700 apiece, a 30% discount to industry leader Comcast's $3,500-per-subscriber value. As a bonus, Mullick says Cablevision could be a takeover target. The likely buyer: The cable unit AOL Time Warner (AOL ) plans to spin off later this year.
Cable's hot prospects have also buoyed News Corp. (NWS ) Larry Haverty Jr., vice-president at State Street Research, says its Fox (FOX ) News, which overtook CNN (AOL ) in the ratings this year, is catching up in ad sales as well. He also likes the cost discipline at its movie studio and TV stations. It doesn't hurt that Fox's movie studio has a hit in X2: X-Men United.
Strong upfront ad sales for Viacom (VIA )'s red-hot CBS and MTV franchises make Viacom the choice of some investors, including Merrill Lynch analyst Jessica Rief Cohen, who projects a 12-month $56 a share for the stock, which trades at $45.88.
In the dealmaking game, few top John Malone's Liberty Media, whose collection of assets includes Discovery Channel and Starz Encore. Malone has simplified his often-confusing corporate structure, buying back pieces in his company held by minority shareholders. That has helped boost Liberty's stock by 20% this year. Ajay Mehra, a portfolio manager at Columbia Management, figures that with more than $5 billion in cash, Malone could have his choice of income-generating media plays he can buy at distressed prices. One deal the Street could cheer is Malone's likely bid for Vivendi Universal (V ) entertainment unit, which includes its profitable cable channels.
The year's biggest wild card is the Federal Communications Commission's June 2 decision to allow increased consolidation in the media industry. If Congress or the courts don't block the ruling, media investors will be looking for takeover plays. That could keep the spotlight on media shining into next year as well.
By Ronald Grover