What's propping up cable stocks?
By MSNBC's Emory Thomas
In a roller-coaster year for Wall Street, cable stocks seem to keep going nowhere but up, MSNBC's Emory Thomas reports. Shares of industry leaders like TCI, Comcast, Cox Communications and MediaOne each have risen between 32 percent and 67 percent in 1998, and together they're outperforming the S&P 500 by an average factor of about five. Why? Two words: digital technology ... And perhaps two more: Paul Allen.
How hot are cable stocks? Last week, Comcast president Brian Roberts spoke at an analyst conference about his company's outlook, including updates about converting to higher-margin digital service; Comcast shares immediately jumped $3 to close at $44.50 on Sept. 15. Meanwhile, Cox Communications executives told a different gathering of analysts about their own successful digital deployments, especially regarding cable-based telephony; Cox shares quickly rose nearly $4 the next day to end at $52.875.
Both instances demonstrate the power of cable's digital commitment to fuel the industry's stocks. A long-running and expensive campaign to replace the industry's clunky analogue cables with fat and flexible digital pipes is finally coming to fruition.
As a result, cable operators are just beginning to offer their customers a new range of services never available before. At first, the upgrade mostly includes more video programming - specialty channels like the Game Show Network, the History Channel and more pay-per-view movies. But ultimately, these services are intended to serve as a sort of Trojan horse that eventually will invade the living room with interactive features like e-mail and home-shopping.
The new services, of course, bring new revenue. Digital-service subscribers typically pay about $10 a month extra (on top of an average cable bill of about $27 a month) to receive about 40 new channels.
Those customers also tend to watch more pay-per-view movies.
By the end of this year, says Cynthia Brumfield, analyst with Paul Kagan Associates, more than 1 million homes will be paying for digital-cable service. That figure - up from just 40,000 at year-end 1997 - surpasses what many industry executives and analysts had forecast. TCI alone now has about 420,000 digital-cable customers. As of the end of June, Cox had 30,000 digital subscribers in portions of just five different markets after only a few months.
"It is definitely exceeding our expectations," says a Cox spokesman.
Cable companies generally refuse to release information about digital adoption rates, so it's difficult to discern just how much the operators are spending to generate the new premium subscriptions. But the technological advance has gathered so much momentum, and offers so much hope for new sales, that investors don't appear to be too concerned about the details yet.
"The whole world is going digital," says Brumfield, who predicts that some 40 million U.S. homes will take digital cable within the next decade.
HOPING TO SELL
To be sure, the promise of digital technology doesn't shoulder all the credit for the 1998 cable stock run-up. It helps, for instance, that U.S. cable operators remain doggedly focused on domestic markets rather than on shaky foreign economies.
But the march to digital has helped attract the other major contributor to the sector's stock surge: Paul Allen. The billionaire co-founder of Microsoft Corp. - looking to realize his vision of a "wired world" - began a cable-buying binge earlier this year that many analysts and industry executives believe is far from over. (Microsoft is a partner in MSNBC.)
In his latest acquisition, Allen paid $4.5 billion, or about 14 times projected 1999 cash flow, for Charter Communications, a St. Louis-based operator with about 1.2 million subscriber households. That acquisition multiple, analysts say, exceeded anything that had come before it, including Allen's own pricey purchase of Marcus Cable for about 12 times cash flow.
Today, analysts admit that as a result of Allen's initiative, a potential takeover premium is at least partly built into the financial models for some small and mid-size providers like Century Communications. David Goldsmith, for instance, analyst with Buckingham Research Group in New York, suggests a share price target of about $37 for Century, which is currently trading at about $23 a share.
How does Allen play into that formula?
"Well, it hasn't hurt, that's for sure," says Goldsmith. "He's been paying fancy prices for these things, and he has set up a new level of valuation."
In an interview with MSNBC, an individual close to the Allen camp recently suggested that Allen wouldn't be willing to continue paying such a rich premium for future acquisitions.
But analysts aren't convinced.
It depends on the company, says Tom Eagan, analyst with PaineWebber in New York. "A premium isn't a premium if it's a good system" with better-than-average subscriber growth and a modernized digital infrastructure.
"He's not done yet," Eagan concludes.
And that may mean the run-up in cable stocks isn't either.
dailynews.yahoo.com |
