Cable Stocks Get Walloped…Again

Comcast sneezes, other cable companies catch cold
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Just when cable stocks were showing some improvement from a post-earnings season downdraft, they were kicked around again after industry bellwether Comcast Corp. revised its 2007 guidance ahead of an investor conference presentation.

Cable stocks were building some positive momentum in the wake of FCC Chairman Kevin Martin's failed bid to prove the industry had breached the 70/70 threshold, opening it up for new regulation, and relief that operators were steering clear of a costly wireless spectrum auction in January.

However, the momentum reversed course last week when Comcast issued a statement revising several 2007 operating and financial metrics due to challenging economic and competitive environments. More than anything, a retraction in projected revenue generating unit (RGU) growth to 6 million units in 2007 from the 6.5 million originally forecast caused many investors to cringe.

On Monday, Time Warner Cable hit a high of $27.51, its highest level since Nov. 7 while Cablevision touched $27.65, its highest level since Nov. 5. Both slid on the Comcast news and were off 5.3% and 6.5%, respectively, from those highs by Thursday's close.

As a counterpoint to basic subscriber losses, cable operators often point to their RGU growth, or sales of additional services. And while Comcast notes its 2007 growth is still higher than the 5 million added in 2006, deceleration in this metric forecast was too much for already skittish investors to bear.

Comcast also revised its revenue growth projection in 2007 to about 11% as opposed to the previous guidance of at least 12%. The cable segment's operating cash flow growth will be approximately 13% as compared to at least 14%, while consolidated operating cash flow growth will be approximately 13% versus previous guidance of at least 13%.

Comcast also sees capital expenditures 5% higher at $6 billion for the year. Free cash flow guidance was revised to 80% of 2006 levels from 90%.

The sector perked up late in the week, rising with the broader market as the Dow gained over 370 points from Tuesday's close to Thursday's.

The Bush administration's proposal to freeze interest rates on some subprime mortgages may give cable some hope as it could help stem rising foreclosures, which are at the highest levels ever, according to the Mortgage Bankers Association.

But Oppenheimer analyst Tom Eagan says that the support late in the week was likely due to bargain hunting. “[This week we] got a sense of the fourth-quarter numbers and stocks reacted accordingly,” Eagan said. “There are still some questions about 2008, but the stocks are at a point where you get value investors interested in them.”

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