Sectors & Trends
Foreign cable companies connect with investors
The sharp appreciation of U.S. cable stocks is spreading overseas. Experts pick NTL, United International and Rogers as favorites to benefit from demographics, broadband and takeovers.
By Michael Parrish ,MSN Investor, 5/24/99
The stunning gains of U.S. cable-television companies' shares have electrified investors over the past year, but it looks like the same pay-per-view movie is just about to begin overseas.
In part because the regulatory climate on foreign soil is friendlier and more predictable than in the U.S. -- and because their values look compelling -- overseas cable companies seem like a good bet for sharp appreciation. "We've seen how companies like Microsoft (MSFT) and AT&T (T) have validated cable here," says Lou Kerner, a Goldman Sachs analyst. "Now we're seeing the same thing happen internationally." (Editor's note: Microsoft owns and publishes MSN MoneyCentral).
Kerner believes investors are piling into foreign cable rather than foreign phone companies because cable has several advantages for bringing fast Internet connections and video-on-demand to consumers' homes. Not only does broadband technology largely favor cable, in his opinion, but "cable companies have traditionally been better at marketing" new stuff to consumers.
Among the most promising of a wide range of non-U.S. cable players, according to analysts:
United International Holdings (UIHIA), a $3 billion Denver-based company with cable operations in 20 countries.
NTL Inc. (NTLI), with home offices in New York, a $5.5 billion company already offering bundled cable to the United Kingdom. (Editor's note: Microsoft owns a stake in NTL.)
Telewest Communications (TWSTY), a Surrey, England-based company worth $4.2 billion that provides a third of all U.K. cable services. (Editor's note: Microsoft owns a stake in Telewest.)
Rogers Communications (RG), with its main office in Toronto, the $6.2 billion leader in Canadian cable.
Shaw Communications (SJR), the $3.6 billion No. 2 cable firm in Canada, based in Calgary.
@Entertainment (ATEN), with corporate headquarters in Hartford, Conn., but operations based in London -- a $330 million firm that's a powerhouse in Poland's thriving cable scene. "We like them a lot," says Kerner. "They're undervalued, and yet they're the dominant cable operator there."
United International and Rogers already have run up strongly, but if their stocks respond in the future the way U.S. cable companies have, watch out: Since Microsoft and AT&T highlighted their interest in the past year, top cable firms Century Communications (CTYA), Adelphia Communications (ADLAC), Comcast (CMCSK) and Cablevision Systems (CVC) have risen 258%, 243%, 201% and 126%, respectively.
--------------------------------------------------------------------------------
Company Report
1-yr Chart
Earnings Estimates
United International Holdings is a top pick of many observers.
--------------------------------------------------------------------------------
'Great, but very complicated'
United International Holdings is a top pick of many observers. Kerner, who recently upgraded his price target for 1999 from $58 to $75, calls it a "great, but very complicated company." Although its shares have run up from $18 to $70 in the past 12 months, U.S. investors have shown some hesitation to invest, Kerner says, "because nobody's going to go to Europe and visit Amsterdam and Hungary." United International also has operations in Asia, Australia and Latin America.
United International is countering investors' reluctance by spinning off chunks of its holdings to make their individual value visible. The first was United Pan-Europe Communications (UPCOY), an Amsterdam-based cable company that operates in 10 European countries and Israel, in which United International has a two-thirds stake. The stock has had a nice pop up from $40 in February to more than $60 now. United International is widely expected to bring its Australian cable assets public next.
Ted Henderson, managing director of research at Janco Partners, a Denver boutique research firm focused on the telecom industry, also likes United International, which is based in his own back yard. "We expect aggressive growth," he says, in United International, NTL and Telewest.
UK Cable
--------------------------------------------------------------------------------
Company Report
1-yr Chart
Company Report
1-yr Chart
Canadian Cable
--------------------------------------------------------------------------------
Company Report
1-yr Chart
Company Report
1-yr Chart
Too steep for new investors
NTL, the early bundler, made its mark by offering cable TV and telephone for the price everyone else was charging for telephone alone; it added Internet service a short while ago. It also bulked up its share of U.K. cable by buying Comcast UK Cable Partners. Telewest, meanwhile, has more than 2 million cable and telephone customers in the U.K. and delivers an Internet connection through its cable lines.
Both NTL and Telewest already are trading near their 52-week highs, which is a tad rarified for Salvatore Muoio, a communications and media analyst who runs SM Investors, a New York-based investment partnership. Muoio believes that valuations for the big U.K. companies, as worthy as they are ("terrific businesses, great management"), are too steep at the moment for new investors. "The same opportunities existed two years ago," says Muoio, "it's just that the market didn't believe it." Now the market does, he says, and that belief is reflected in the stock.
Values in Canada
Which brings us to our northern neighbor. "Canada actually represents the best values globally that we see today," says Kerner. Bob Bek, communications and media analyst for CIBC World Markets Securities, in Toronto, heartily agrees. He has "strong buy" ratings on virtually every public cable company in Canada.
"The broadband concept, the culture, the technology and the products are exactly the same as those developing in the U.S.," notes Bek. "But Canada trails the U.S. in valuations -- and we really haven't seen any strategic deals, which might give an additional boost to the stocks." He doesn't expect this isolation to last long. And despite benign neglect, Canadian cable companies have already seen a nice upward movement in stock prices. Bek expects big growth in the sector to last at least through the next year, however.
Rogers Communications, the sprawling leader, is a big favorite. Despite a float restricted by a 90% ownership stake still held by the founder, the stock already has run up from $8 to more than $20 since the first of the year. "It's just a solid cable business," says Bek, "with great demographics, a solid wireless business and the largest and most-coveted areas in Canada."
Another big Canadian operator is Shaw Communications, which also has had a nice recent run, despite 75% ownership by the founding family. Like Rogers, Shaw has holdings in cable, telecom, Internet access and ordinary radio stations. Shaw has some of the highest margins in the Canadian cable industry, Bek notes, "and they're extremely good at rolling out new businesses -- including digital television and high-speed Internet access." (The company plans to split into two entities, spinning off the media content assets.)
--------------------------------------------------------------------------------
A third big Canadian cable company is Groupe Videotron (CA:VDO). Not yet in the black, the company is considered a world leader in research to make telephone calls over the Internet a common reality. "They're on the bleeding edge of developing this technology," says Bek. "It's going to be some time before they make money off of it, but if it does work -- and AT&T has basically bet the farm on the ability to do it at some point -- the world would be watching, and there's value to that."
Two smaller Canadian players that Bek likes are Cogeco Cable (CA:CCA), a small, pure-play cable company, and Moffat Communications (CA:MOF), an even smaller but sturdy cable provider.
Meanwhile, Microsoft continues to shop for stakes in overseas cable and telecom companies. "Since Microsoft invested that billion dollars in Comcast," says Kerner, "it's been a rocket ship ride ever since."
Of course, not all foreign cable companies are slam dunks. For instance, while many analysts see a big future for Great Britain's $30 billion Cable & Wireless (CWP), the current outlook for its stock price isn't considered attractive. Doug Fairclough, chief investment strategist at ClearStation.com, notes that Cable & Wireless' stock has traded sideways on low volume for the past year while its rivals' shares have skyrocketed. "They're just not where the big valuations are going to be," he said. |
