Cable stocks appeared to be on the rebound in 2009 after a dismal two-year slide, with the MSO sector rising by 42% and programming stocks gaining 47%.
At least two cable giants helped buck the negative stock trends in 2009 — the first full year of the recession. Time Warner Cable nearly doubled its share price from $22.22 on Jan. 2, 2009 to $41.39 on Dec. 31 and Cablevision Systems stock rose 48.6% for the year ($8.44 per share) from $17.38 on Jan. 2 to $25.82 on Dec. 31.
“Cable companies were the canary in the coal mine when housing formations started to turn negative a couple of summers ago,” Miller Tabak media analyst David Joyce said. MSO stocks were initially affected by fears the capital markets would shut down completely in the beginning of the year, he said, a fear that was partly alleviated when Cablevision Systems stepped up with two $500 million debt offerings in January and February that helped open the door for other companies.
“With the fear subsiding, the companies that had potential liquidity issues had the market not opened up again, it really led those equities to outperform,” Joyce said.
Cablevision's rise was also fueled by its strong operating performance and its plans to spin off its Madison Square Garden unit (which rekindled speculation that it would sell other assets), Time Warner Cable's rise was due to a few mechanical changes in the stock. In March, Time Warner cable completed its separation from Time Warner Inc., issuing a $9 billion dividend to its former parent and later in the month completing a one-for-three reverse split of its shares.
Collins Stewart media analyst Tom Eagan said that dividend payment hurt TWC stock early in the year, but the shares rebounded after the company began paying back some of that debt and investors began to rotate out of Comcast and into TWC.
“As leverage became OK, investors started to see more upside potential in TWC because of that leverage,” Eagan said.
Among the losers, Comcast fell about 6% to $16.86 per share on Dec. 31 and Mediacom Communications lost about 5% of its value (24 cents) to $4.47 during the 12-month period, much of that decline took place in the latter part of the year. Comcast stock was holding its own, hovering around the $17 level in September when speculation, later confirmed, that it was in talks to acquire a stake in NBC Universal began to surface in October. That sent the stock into a slide — it sank as low as $13.95 on Nov. 5 — that lasted until the deal was officially announced on Dec. 3.
For Mediacom, news that it could rekindle a retransmission consent battle with Sinclair Broadcast Group began to weigh on the stock in late October — it was trading at around $5 per share before it announced that it had filed documents with the Federal Communications Commission claiming Sinclair was not negotiating in good faith. The two reached a one-year deal on Dec. 31 and that seemed to ease the pressure for awhile, but Mediacom has said that it is still pushing for retrans reform in Washington.
Joyce said that the retransmission overhang is distracting investors from the small-market MSO's strong operating metrics. Mediacom is on track to generate about $1.40 per share in free cash flow in 2009, which translates into a trading multiple of about 3.3 times. Other, larger cable stocks are trading at seven to 10 times estimated free cash flow.
“People are giving them almost no credit for the amazing amount of free cash flow they are generating,” Joyce said.
The programming sector, which was pounded in 2008 as the advertising market dried up (stocks were down 47.3% in 2008) gained most of those losses back in 2009, rising 47% in the period.
Not surprisingly, Discovery Communications led the programming pack — its stock price more than doubled from $14.65 apiece on Jan. 2 to $30.67 per share on Dec 31. Discovery was the only major programmer to report domestic ad sales gains for the first nine months of the year.
“They [Discovery] were the one media name that everyone felt comfortable enough sticking with and having exposure to,” Joyce said.
Scripps Networks Interactive rose almost 75% in 2009 from $23.75 on Jan. 2 to $41.50 on Dec. 31, also the year it agreed to pay almost $1 billion for a controlling interest in the Travel Channel. Other big gainers included CBS (up 57.7%); Viacom (up 48.9%); News Corp. (up 56.5%) and Walt Disney (up 34.8%).
Eagan said there was one common thread in the content rebound. “Throughout the whole process, there was continued interest in cable networks,” Eagan said. “Scripps and Discovery outperformed them all, not only during the ad pullback in the first half of the year, but also in the resurgence in the second half.”
While the growth was substantial and fueled by increasing signs that the ad market was bouncing back, the stocks also were coming off a low base. CBS in 2008 plunged 70%, News Corp. was down 55% and Scripps fell 46% as the global recession hammered programmers.
Joyce said that ad sales appeared to show signs of recovery in November, which should be a good sign for the sector.
“The trajectory is still positive and the visibility has been pretty decent for the first quarter for TV advertising,” Joyce said. “There will be a concern, post first quarter, on what the new normal will be for consumer discretionary spending and therefore advertising.”
UP, UP AND AWAY
Cable stocks appeared to rebound last year:
|Share Price 1/02/09||Share Price 12/31/09||% Change|
|Time Warner Cable||$22.22||$41.39||86.3%|
|Time Warner Inc.||$29.70||$29.14||(1.9%)|