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Revenue flowing through pipe makes cable attractive

By: Kathleen Gallagher, Milwaukee Journal Sentinel

For skeptical investors, two words describe cable's value: dumb pipe.

For Ann Miletti, cable provides more.

"They've become companies that have multiple revenue streams coming from customers," said Miletti, manager of the Wells Fargo Advantage Common Stock Fund. "Growth has slowed, but they're companies that grew through the recession and we think there's more growth potential."

Whether it's digital cable, high speed data, telephone, or even advertising, cable operators are collecting on a variety of products and services. They're also expanding from their traditional base of residential customers to small-and medium-sized commercial customers, Miletti said.

The commercial business opportunities and potential advertising revenue growth as the recession ends should drive earnings, she said.

Cable operators also are spending less on laying cable, Miletti said. Declining capital spending is driving more cable operators to pay dividends, and most of their stock prices are attractive, based on earnings and cash flow multiples, she said.

Here are two names Miletti has in the Wells Fargo Advantage Common Stock Fund:

Cablevision Systems Corp. (CVC, $23.39), Bethpage, NY, is a telecommunications, media and entertainment company.It is spinning off its non-cable businesses, which include Madison Square Garden and its sports teams, the New York Knicks, Rangers, and Liberty, New York's Radio City Music Hall, the Chicago Theater and other properties. Its shares have traded as high as $27.02 and as low as $9.34 in the last 52 weeks.

"Their point is to highlight the value in the entertainment piece of the business - we think it will highlight the value in the cable operating business," Miletti said.

Time Warner Cable Inc. (TWC, $41.28), New York, provides video, data and voice service to residential and commercial customers in the U.S. Its shares have traded as high as $43.13 and as low as $20.19 in the last 52 weeks.

It's very clear Time Warner Cable is focused on, and has good opportunities in, the commercial telephone market, Miletti said.

The company's shares are trading at about 5.5 times cash flow, in the low end of their historical range and below their average of eight times, she said. Cablevision is paying a dividend and Time Warner Cable appears poised to begin paying one soon, said Chris Miller, an analyst on Miletti's fund.

Free TV programming on the Internet is growing, but Time Warner Cable has a new program called "TV Everywhere" that allows content providers to deliver to mobile devices, but only for cable subscribers, Miller said.

"TV Everywhere still allows cable operators to be everywhere for the future," Miletti said.

The biggest risk associated with these shares is the possibility of another dip into recession, Miletti said. There's also the threat of more government regulation, she said.

Miletti and her team typically buy stocks at a 50% to 60% discount to what they calculate is their private market value, or the price an outside buyer might pay for the company. Time Warner Cable shares are trading well below their estimated private market value, Miletti said.


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