Sam,
Re: Fiber vs. Wireless
From MS Investor:
Connect With the Cable Guys
Sector stalwarts Cablevision and Comcast are humming again as investors bet they'll turn the Internet into a mass medium.
By Neal Koch
While hosting a dinner for cable television executives in a Seattle restaurant early in May, Microsoft Chairman Bill Gates complained that cable operators weren't upgrading their systems fast enough to carry Internet traffic. Sitting next to Gates was Brian Roberts, president of Comcast Corp. (CMCSK), the country's fourth-largest system operator, who seized the moment: "Why don't you invest in the cable industry?" he reportedly asked Gates. "It would make a really strong statement."
Within weeks, Gates agreed to spend $1 billion for a stake in Comcast, launching a bull market in cable stocks the likes of which the industry has not seen in years. That's because in one fell swoop Gates persuaded the markets that he had anointed cable operators as a whole as the future kings of delivery of high-tech services, brushing aside satellite and telephone companies. "It was a clear statement," Time Warner Chairman Gerald Levin told a group of analysts shortly afterwards, that "the computer industry believes its future is tied up with hardware and software delivery of data to TVs and computers through cable."
Indeed, within three days of the Microsoft (MSFT) announcement, the cable industry's stock market value increased $10 billion. Comcast's shares have since jumped about 55%, compared with a 15% rise in the Standard & Poor's 500 Index. Cablevision Systems Corp. (CVC) has soared 144%. Tele-Communications Inc. (TCOMA) has risen 32%. And even long-sluggish Time Warner (TWX) shares have risen 25%, partly on the strength of reports -- still not realized -- that Microsoft also began talks with the company about a $600 million-$1 billion investment. (Microsoft is the publisher of Investor).
The good news is that the big run-up in cable stock prices may not end for another two years, according to many analysts and money mangers. Merrill Lynch media analyst Jessica Reif Cohen says she is "hugely bullish," predicting sector gains of 30% to 50% over the next 12 months alone. In fact, in a report boldly issued in the midst of last October's overall market turmoil, she insisted: "We have not been this bullish on cable in more than four years." Cablevision is up 25% since Blue Monday on Oct. 27, for instance, while tech bellwether Dell Computer (DELL) is down 2%.
The turnaround is all the more amazing in that it has followed a year in which the cable stocks were in a deep slump. Amid mounting fears of competition from satellite and telephone companies, investor patience had worn thin with the industry's insistence that they focus on cash-flow reports while ignoring the companies' huge debt loads and continued earnings losses. So when the federal Telecommunications Act of February 1996 added huge new uncertainties, investors fled the sector, sending shares into a tailspin. S&P's index of broadcast stocks -- half of them cable companies -- fell 16.6% in 1996 (exclusive of dividends) while the broader S&P 500 gained 20.3%.
"The sector was ripe for bottom-fishing," says Sam Stovall, S&P sector strategist.
But few bit -- until Bill Gates. In his wake, IBM (IBM), Netscape (NSCP) and Sun Microsystems (SUNW) all held discussions with cable companies. As a result, through the end of November, the S&P broadcasting index has shot up 47.9% this year compared to just 29% for the S&P 500. "Everyone follows Bill Gates the way they follow Warren Buffett," says Stovall.
While Stovall says S&P is neutral on cable now, a number of major market players say they expect continued big stock price gains by 2000 for several reasons. First, technological advances promise to turn cable boxes into both super-modems and VCRs. With increasing channel capacity due to digitization and compression of signals, the industry is planning to provide movies on demand, with films restarting every 15 minutes. And system operators have begun rolling out "broadband" technology that produces modem connections which virtually eliminate the current waits plaguing online users. These services are expected to yield profits much higher than premium movie channels.
Moreover, cable TV audience share continues to grow at the expense of broadcast networks, whose combined audience shares are at historic lows and whose shows are losing Emmy awards in droves to cable programming. At the same time, telephone companies have retreated from competition. And most cable systems remain in monopoly control of their markets, allowing them to continually push subscriber rates higher.
To be sure, cable companies are still highly leveraged and face substantial build-out costs for replacing coaxial cable with fiber optics to allow for broadband. Nevertheless, many analysts insist that overall capital expenditures are slowing at a time when interest rates remain low.
As a result, one hot pick among big market players is Cablevision, which ran up from around $32 a share before Gates' Comcast buy to about $84 now. "I personally believe it's still got a long way to go," says Ian Crowe, vice chairman of TD Securities, a subsidiary of Canada's Toronto Dominion Bank and one of the industry's major lenders and financiers. Crowe has been predicting that Cablevision's assets will be worth $230 a share in 1999. They are the largest holding in media money manager Mario Gabelli's funds, and a top choice of the value-oriented Oakmark funds as well.
Cablevision typifies the industry in that it has turned around in a very short time despite its massive debt. Much of this newfound faith results from the recent relinquishment of some control by the father-and-son management team of Charles F. and James L. Dolan. Other reasons include Cablevision's impressive assets -- the highest revenue-per-subscriber numbers in the industry, the biggest cable system in the New York market, and ownership of Madison Square Garden, New York sports teams and cable networks, including American Movie Classics and Bravo. Moreover, in the past year, the company struck up key alliances, including deals that strengthened its subscriber base, sports programming and moved it toward broadband.
Cablevision has been so hot, it has overshadowed the company that started this bull market, Comcast. Now selling around $28 a share, Wall Street targets appreciation into the mid-30s for 1998.
Another top pick is industry gorilla TCI, despite the fact that its stock has gone nowhere in three years. Having jumped about 50% since July, it's now trading around $28. The brokerage Furman Selz pegs it as No. 1 among cable stocks for the year ahead, partly on the strength of the company's claim that it is rapidly ramping up capital spending to upgrade its systems for broadband and other data transmission.
The cable sector upswing has even brought relief to long-suffering Time Warner. Although net debt remains high at $18 billion, Cohen has set targets for the stock, now trading around $59 a share, at $70 over the next 12 months and $90 within two years. The Merrill Lynch analyst believes that within six months the company will be able to start buying back stock.
But other analysts argue that the stock's recent climb has been partly wishful thinking among those choosing to focus on its strongly performing cable business while overlooking the company's big problems in music and movies. It's a "euphoria" that Sanford Bernstein analyst Tom Wolzien has suggested is misplaced. Watch out if cable earnings growth slows, warn some. "The stock would feel the force of everything at once," veteran industry analyst Hal Vogel of Cowen & Co. recently cautioned.
The last big speculative play in cable may be U S West. The telephone company spun its cable operations off in October under the name U S West Media Group (UMG), soon to be renamed MediaOne Group. U S West's nearly $5 billion acquisition of Continental Cablevision last year made it the third-largest cable operator in the U.S.
Curiously, although proud of getting Continental's highly prized management team in the deal, U S West then consolidated its headquarters in Denver, leading key Continental executives to defect. Its cycle has also been a bit out of sync with the sector. U S West's stock quickly lost the bump-up in price it had enjoyed from the Microsoft-Comcast deal, but then gained about 30% since August to trade around $28 a share. Now the only major cable company without a controlling shareholder, analyst Cohen has labeled it ripe for a takeover. |
