Cable television stocks have been caught in a volatile crosscurrent on Wall Street the last two months.
While uncertainty over the impact of rate regulation scuttled the prices of cable stocks in April, a wave of technological advancements announced in recent weeks by Time Warner, Tele-Communications Inc. and Viacom, among others, has brightened the long-term outlook for the industry and rekindled investor interest.
Most financial types are confident that the clouds hanging over the industry are now parting, with the potential positives of the technological revolution outweighing the drawbacks of reregulation.
“At this point, investors are overlooking the valley and looking at the benefits that will accrue to the cable industry through the new technology,” says cable analyst Edward Hatch of UBS Securities. “Cable companies will be able to deliver a diversity of unregulated services that will more than offset the negative impact from rate regulation of the basic service.”
Such optimism would have been unthinkable in early April, when cable stocks plunged 30% on news that the Federal Communications Commission was taking a hard line on basic cable rate regulation.
But news of U S West’s $ 2.5 billion investment in Time Warner Entertainment, TCI’s decision to spend $ 2 billion over the next four years on system upgrades, Viacom’s pact with AT&T to develop interactive cable services and, most recently , Time Warner and TCI’s decision to join forces to establish a cable industry standard to speed delivery of the electronic superhighway of the future, has drawn investors back to the stocks.
In a dramatic turnaround, the Variety Furman Selz Cable Operators index has risen 24% since May 14, and some cable stocks are again nearing their all-time highs.
“The mood is of very heightened interest, even with the FCC rate rulings hanging over the industry,” says Bear Stearns cable pundit Ken Goldman, who currently has long-term buy recommendations on TCI, Comcast, Time Warner, Cablevision Systems and Jones Intercable.
“I’ve personally never seen greater interest among general investors. There are still concerns over reregulation and potential controversy regarding retransmission consent negotiations, but they have already been largely offset by the technological story, which is shaping up as the theme of the decade. Portfolio managers are coming to the conclusion that they need to have a position in these stocks longer term.”
No one is saying reregulation will not have a continuing impact on the stocks.
Some believe the current wave of announcements by the industry is simply an effective public relations effort to distract investors from the real problems still facing cable operators on the regulatory front. “They are focusing on the hoopla of the future to offset the pains of the present,” contends analyst Dennis McAlpine of Josepthal Lyon & Ross.
He says the impact of both retransmission consent and must-carry remains a major question mark: “Most analysts agree that operators are losing as much as a year of cash-flow growth. That’s a serious hit.”
Still, most on Wall Street believe the stocks will overcome such hurdles.
“There’s one more shoe to drop and that should happen within the next month when the cable companies come to the market and spell out what the impact of rate regulation will be on them,” says Oppenheimer stock-picker Jessica Reif. “But that’s the only real negative, and that’s a near term concern. Once we’re beyond that, there should be a pretty good move up in the stocks.”