Cable stocks continue to act fairly well. A mid-August pause and slight correction has given way to moves back to 2012 highs. As noted prior columns, I think investors are finding the group attractive primarily because the business is 100% domestic and the companies are aggressively allocating capital in favor of shareholders with rising dividends and ever larger share repurchase programs. In addition, cable is viewed as a recession-resistant business. A final positive for the bull case for cable stocks is that despite a lot of high profile worry, cord cutting does not appear to be material or accelerating.
While the stocks act well, investor concern about the core video business remains high. If cord cutting concerns have eased, worry about rising programming expense has risen. SNL Kagan’s Tony Lenoir recently noted
that per subscriber programming rose three times faster than video ARPU in the second quarter of 2012. Programming costs overall were up 7% year over year, the faster pace since 2009. Programming costs per subs rose a faster 9.6%, while video ARPU was up just 3.5%. Clearly, the video business is under some pressure with margins contracting and sub growth slightly negative.
Often forgotten and largely explaining the resilience of the entire cable business model is the fact that broadband is moving to be the lead product for the industry. According to BofA-Merrill Lynch analyst Jessica Reif Cohen, the cable industry captured 118% of total broadband net adds in the second quarter of 2012, continuing a long string of market share gains at the expense of the wireline telcos.
In the second quarter, Comcast
(CMCSA) earned 24% of its cable revenue from high speed data, up from 23% a year ago. Video revenue was 51% of revenue in 2012 and down from almost 53% in the second quarter of 2011. Clearly, video is becoming less important on the top line.
It is also becoming less important on the operating cash flow line. Broadband is a very high margin product, comfortably above the mid 30% to low 40% profit margin for the industry as a whole. Broadband requires high fixed investment, but that same investment allows upgrades of the video product, the existence of the telephony product, and new service offerings to small and mid-sized businesses and residential home security and monitoring.
Not that long ago, a worry existed that wireline broadband would be displaced by wireless broadband. This remains a long run risk, but consumers and businesses continue to demand more and more from the Internet such that the capacity and speed of wireless networks cannot keep up with the remarkable advances of mobile devices and applications. Wireline networks remain well ahead in the speed and reliability game. The news is even better for cable investors as cable networks remain well ahead of telco networks except in the geographically limited markets where Verizon
(VZ) offers FiOS.
Keep an eye on over-the-top trends, cord cutting, programming expenses, and seemingly ever growing affiliate fee and retransmission fee battles. Just don’t lose sight of the bigger picture in cable: Resilient albeit slow growth, high free cash flow being returned to shareholders, and the best high speed network in the land.
Comcast is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in the funds’ investment management company, and has personal monies invested in the Funds.
This column was previously published by SNL Kagan on www.snl.com.
No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic=
ations, and related technologies. Steve Birenberg is co-portfolio manager o=
f Entermedia, owns a stake in the Funds' investment management compan=
y, and has personal monies invested in the Funds. CBS and Discovery Communi=
cations are widely held by Northlake Capital Management, LLC, including in =
Steve Birenberg's personal accounts. Steve is sole proprietor of Nort=
hlake, a long only registered investment advisor.
The information on this website solely reflects the analysis of or opin=
ion about the performance of securities and financial markets by the writer=
s whose articles appear on the site. The views expressed by the writers are=
not necessarily the views of Minyanville Media, Inc. or members of its man=
agement. Nothing contained on the website is intended to constitute a recom=
mendation or advice addressed to an individual investor or category of inve=
stors to purchase, sell or hold any security, or to take any action with re=
spect to the prospective movement of the securities markets or to solicit t=
he purchase or sale of any security. Any investment decisions must be made =
by the reader either individually or in consultation with his or her invest=
ment professional. Minyanville writers and staff may trade or hold position=
s in securities that are discussed in articles appearing on the website. Wr=
iters of articles are required to disclose whether they have a position in =
any stock or fund discussed in an article, but are not permitted to disclos=
e the size or direction of the position. Nothing on this website is intende=
d to solicit business of any kind for a writer's business or fund. Miny=
anville management and staff as well as contributing writers will not respo=
nd to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.