September 6, 2007 / 6:18 PM / 12 years ago

Cable stocks may lose cache as defensive play

NEW YORK (Reuters) - Investors are used to turning to cable stocks during an economic downturn, thinking that Americans would rather travel less, spend less and even eat less than turn off their cable TV service.

But now that monthly cable bills are higher due to “triple play” packages that include telephone and Internet service fees, some analysts are questioning whether cable is still a defensive stock.

Furthermore, the latest market turmoil has been characterized by rocketing mortgages, rising debt costs and a slump in housing growth that have direct implications for cable companies such as Comcast Corp (CMCSA.O) and Time Warner Cable Inc TWC.N.

“I’d say cable is slightly less defensive because the bills are so much higher with the triple play,” said Thomas Eagan, an analyst at Oppenheimer & Co.

Comcast, which has 24 million subscribers, has been so successful in rolling out triple play packages that its monthly average revenue per user last quarter shot past $100 for the first time.

After the first-year promotion period, most households with triple-play packages actually pay around $120 to $140 a month, analysts say. That compares with cable TV-only bills that average at about $62.

“I’ve never been in the camp that cable is entirely defensive. I think particularly now with triple play, it’s become more difficult to say it is,” said Tuna Amobi, an equity analyst at Standards & Poor’s.

“There’s definitely some concern about consumer confidence and all these issues are going to affect spending on cable with pay-per-view for example.”

Cable executives often argue that triple play helps keep customers loyal, as the packages are cheaper than buying cable TV, telephone and Internet services from separate providers.

The launch of triple play in the last two years has indeed helped cable companies lower customer losses, known as churn.

But if the U.S. economy heads into a full blown recession, analysts say households will scrutinize big cable bills.

“True, the triple play does reduce churn as there is a halo effect on Internet and basic video, but I expect that is offset by consumer cognitively paying more to one provider,” Eagan added.

CABLE VALUATIONS STILL HOLD UP

Even for long-term investors in cable there is a note of caution due to the beleaguered housing market, which in July

saw the highest number of unsold homes in 15 years and a significant drop-off in new house sales.

Christopher Marangi, portfolio manager at Gamco Investors, which holds Comcast, Time Warner Cable, and Cablevision Systems Corp CVC.N, said cable stocks are attractively priced, but he is keeping an eye on how severe the housing downturn becomes.

“There’s no deterioration in cash flow, but a reduction in the rate of growth which is still very healthy and more than reflected in the trading multiples,” says Marangi.

Time Warner Cable shares have dropped 15 percent since a year high of $42.10 on July 23. Over the same period, Comcast shares have fallen 11 percent.

Comcast’s enterprise value is currently around 9 times the average Wall Street forecast for 2008 earnings before interest, tax, depreciation and amortization (EBITDA), while Time Warner Cable is trading at 8.6 times on that measure, according to Reuters Estimates.

Craig Moffett, analyst at Sanford Bernstein, estimated Comcast’s core cable business at 7.9 times EBITDA. He said the stock is undervalued and has a target price of $40 or 10 times earnings.

Moffett also has a target multiple of 10 times EBITDA for Time Warner Cable, which trades around 8.2 times by his calculations.

With these valuations Moffett does see cable as a defensive stock.

“Given the growth rates of these companies the valuations look unsustainably low,” says Moffett. “Logic dictates that these stocks would be particularly attractive as defensive if we see a consumer-led recession in 2008.”

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