Analyst favors infrastructure
plays in cable TV sector
By Colleen Bazdarich, CBS MarketWatch
Last Update: 1:34 PM ET Sep 14, 1999 Personal Finance News
Join the discussion
LITTLE ROCK, Ark. (CBS.MW) -- The newest players to watch in the cable television industry? The plumbers -- not the companies that build the house, but the guys who make the systems work.
"If I ever have grandkids, they will ask me what it was like to live before broadband access all the time, everywhere."
John Corcoran,
Stephens Inc.
New media analyst John Corcoran of Little Rock-based Stephens Inc. claims says the builders of the cable industry -- operators like AT&T and Time Warner -- have gotten a little too pricey for his taste. So he advises investors to stick with infrastructure companies like TV Guide and Gemstar, which help consumers navigate the labyrinthine world of cable communications.
But don't get him wrong. Corcoran is optimistic about the entire sector. He talked with Colleen Bazdarich of CBS MarketWatch about the great buys he sees among cable industry stocks and a world that will be utterly changed in the future by broadband communications.
How have cable stocks been performing lately?
Corcoran: Cable stocks have been a little off their all-time highs, in part because we have been been undergoing a technology sector slaughter. So they have come down a bit. But the bottom line is system valuations are relatively close to their all-time highs, subscriber valuations are relatively close to their all time-highs. When you look back over the last 18 to 24 months, the cable sector has done extremely well.
Do you have any picks for the sector?
Corcoran: I am primarily interested in infrastructure plays for the sector because in my view many of the cable stocks are quite pricey right now. What is a great infrastructure play for the cable industry? Something like TV Guide (TVGIA: news, msgs). It is a very savvy infrastructure play for the cable industry, the satellite industry, the printing industry and the Internet sector as well.
In this sector there are the large cable operators -- Time Warner (TWX: news, msgs), AT&T (T: news, msgs), Comcast (CMCSA: news, msgs), Cox (COX: news, msgs), Charter and Adelphia (ADLAC: news, msgs) -- and then the companies like TV Guide. They are not the company that builds the house; they build the plumbing that you will need inside your house.
Why do you like the infrastructure plays?
Corcoran: It limits some of the risk. Right now the cable stocks have taken off so nicely, even though they have come down a bit in the last couple months. Over the last year and a half to two years, they have been on a tear, so we try to limit the risk by not buying at the all-time top of the market. That is part of the reason why I like the infrastructure plays. In some respects they are a bit of a hedge against the big moves in the satellite industry and the cable industry because they really sit on the intersection of the two of them.
Any others that you like?
Corcoran: Gemstar (GMST: news, msgs) is another very good example. I would consider TV Guide and Gemstar two outstanding infrastructure plays for the cable industry, the satellite industry, the Internet sector. They really sit on the intersection of those three.
At Home (ATHM: news, msgs) is a company that I like too. It has been beaten up quite a bit as well, but I think they are doing a lot of things today to position itself very well for the next couple of years. Management has taken a lot of steps today to position the company for good growth going forward. There are still a couple of clouds over this stock, but overall I think people getting in now will be looking back in a year rather favorably on the decision to buy at these levels.
What about the long term for this whole sector?
Corcoran: I think that generally speaking the cable industry has a very bright future. I think that the cable companies will be some of the broadband providers of choice for a large part of the U.S. on the residential side. Probably a year from now they will have to start delivering on all the promises that have been made in terms of selling Internet access, selling telephony, analog video, digital video and a host of other services over the cable infrastructure.
If they can deliver on that, they will continue to do very well. So it is a sector that has moved up a lot, but I think it has a bit to go before it really reaches its peak. It has moved up a lot, though, so stocks are a lot pricier than they were. That is why I favor these infrastructure plays.
There had been some talk in the past about breaking down the provider monopolies. Are most of these cable companies still holding a monopoly on the areas that they provide service to?
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Updated:
1:47 PM 09/14/99
Corcoran: You ask a good question and the answer is absolutely yes. In most of the U.S. there is one incumbent cable provider of consequence. Now do we have in some pockets some overbuilders or some competition developing? Yes. But by and large, the industry has grown up as a regulated monopoly, and in much of the country, there is only one cable operator you can get service from.
So is competition ever going to be a problem? Are there some risks in investing in these stocks?
Corcoran: On the cable side of life, the real risk is that you would be getting in toward the top of the market. So there is a bit of a risk getting in there, but think about the future. Will we be moving toward an environment where you will have broadband access to the Internet at home, at work, at play and while travelling? I think the answer is yes. Are there going to be key companies that grow a lot to provide those services? Yes.
Just the way you ask someone who is 90 now what is was like to live in a time before everyone had a car or indoor plumbing, if I ever have kids or grandkids, they will be able to ask me what it was like to live before broadband access all the time, everywhere. I will say, "Well, that was how the world existed for 2000 years." They will scratch their heads and say "Wow, wasn't that inefficient, grandpa?" And I will say, "Well, yeah, of course."
You ask me, do these companies have a bright future -- the answer is absolutely yes.
Colleen Bazdarich is a personal finance reporter for CBS MarketWatch.
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