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Is a Bullish Detente Brewing Among Multichannel TV Service Providers?


Facing a mature market and rapidly rising program costs, cable and satellite companies may be backing off price discounting and focusing on profitability.

It seems like I've been listening to earnings conference calls nonstop for two weeks. The heaviest part of the earnings calendar for media and communications companies has occurred since mid-February. There was news that moved stocks and some news that could have long-term implications.

Overall, the themes remain the same:

1. national TV advertising has recovered from a post-Thanksgiving letdown

2. advertising is now operating with normal sensitivity to economic and network rating trends after completing the recovery off the cyclical low

3. cord cutting is still more worry than reality

4. broadband is replacing video as the driver of the cable industry

The big news from the latest batch of earnings reports came from Comcast (CMCSA) and DirecTV (DTV). Comcast delivered stellar results relative to expectations. Reinvigorated management and low-hanging fruit from years of underperformance is driving Comcast to produce the best results in the industry. Broadband and business services continue to grow nicely, more than offsetting continued challenges on subscribers and profitability in video.

However, the company is battling hard on video, and the Xfinity branding seems to helping as sub losses have moderated. Comcast shares are also getting a boost from its capital allocation program, with big share repurchases and a large dividend increase. Comcast has lower debt than its peers, which is turning to a nice advantage for the stock since investors are souring some on buybacks from heavily leveraged companies.

I was expecting weak results from DirecTV given the promotional environment among satellite companies. The company came through with decent results, however. The big news came from the company's discussion of its 2012 guidance. DirecTV is going to back off marketing for new subscribers and focus on retention and upgrading current subs. The company is accepting the maturity of US multichannel television given the high penetration rates and weak household formation. For DirecTV, this is a little easier given its large and growing business in Latin America.

The ramifications for the entire multichannel provider industry are significantly positive if DirecTV's strategy is followed by others. Dish Network (DISH) provided some encouraging news on this front when it reported this week and indicated it would also moderate its discounting of TV packages. Cable tends to follow satellite when it comes to promotions for video, so the 2012 outlook could be for less price competition.

Given the lack of sub growth potential and rapidly rising programming costs due to affiliate and retransmission fee increases, the shift in strategy is not too surprising and welcome news to investors. I think all the major US cable and satellite stocks are looking better as investments. I continue to favor Comcast and Charter Communications (CHTR) but also have small long positions in Cablevision (CVC) and DirecTV. In addition, I have covered my short in Dish Network.

On the advertising front, we heard from CBS (CBS) and Discovery Communications (DISCA). CBS had disappointing fourth-quarter ad growth given its strong ratings. Management indicated the first quarter of 2012 is shaping up much better, however. Make-goods are other networks that could benefit CBS, which has some scatter to sell at premium prices to the upfront. Discovery Communications led the pack in the fourth quarter with ad growth of 17% on its domestic networks. This is a good example of the cyclical normalization of the ad market, as Discovery is producing strong ratings across the board.

To reiterate, commentary on advertising indicates that the ad market has moved to a normal phase. With the economy seemingly on the mend, this should be good news for ad-supported media stocks. Keep in mind that ratings matter more than ever at this point in the cycle. Many network companies indicated programming spend is going up as they recognize the need to produce ratings to drive revenue growth and sustain profit margins. I am sticking with the winners in ratings, including CBS, Discovery Communications, and AMC Networks (AMCX).

Next week we will hear from Charter Communications and Cablevision. I'll be looking for insights into the evolving competitive environment. Both companies also have their own issues. Charter is bringing aboard its new CEO, the highly respected Tom Rutledge. New CEOs sometimes lower the bar to ease the transition. I do not expect that to be the case at Charter, but new initiatives that pressure margins are possible, as is a focus on acquisitions to drive growth.

Cablevision is struggling with a mature geography, management turnover and turmoil, and weak financial and subscriber performance. The stock has been firm, probably on a little takeover speculation. I am a nervous long but my position is small.

This column was previously published by SNL Kagan on
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.

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