Despite the looming threat of increased regulations, competition from over-the-top providers and the fallout from the pending Comcast-Time Warner Cable merger, cable distribution stocks performed strongly in 2014, up a collective 17% as the promise of more deals and intensified consolidation in the industry outweighed any potential regulatory pitfalls.
While the stocks performed well below the scorching 50% increase they experienced in 2013 — fueled by Charter Communications’s pursuit of Time Warner Cable — consolidation opportunities still seemed to drive the stocks higher. No. 2 U.S. cable provider TWC agreed in February to be acquired by No. 1 MSO Comcast in an all-stock deal valued at about $45 billion, not including debt.
But Charter, whose own unsolicited offer for TWC was rejected last year, cut a series of deals with the two companies that will allow the smaller-market cable operator to double its footprint after the Comcast-TWC deal closes, expected sometime in the first quarter.
The Comcast-TWC deal also will spur the creation of another cable player — GreatLand Connections, a publicly traded operator with about 2.5 million customers that will be 33% owned by Charter.
That company’s potential, coupled with strong fundamentals, helped Charter lead the distribution sector with a 23.5% increase in its stock price from $136.76 to $168.92 per share.
CABLEVISION STRENGTH
The second strongest gainer in the sector was a surprise — Cablevision Systems. Stock in the Bethpage, N.Y.-based operator was up almost 18% for the year, from $17.93 per share to $21.08 each, fueled in part by speculation earlier in the year that the company could be a takeover target.
Cablevision, which leads the industry in penetration of advanced services, had been a victim of its own success in the past year. But although subscribers continued to decline, most analysts see the company as a possible target of Charter, noting that most of the bad news is already baked into its valuation.
“It was a good year for cable distribution,” Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak said. Worries over wireless competition and cable’s success at attracting small businesses and high-speed data customers caused some investors to rotate out of telco stocks and into cable. Verizon Communication was down 3.7% for the year, and AT&T, in the process of acquiring satellite giant DirecTV, fell 3.2%.
Cable stocks have held their own, though some analysts had foreseen a down year for the sector, particularly after President Obama made it known that he favored a move toward more onerous Title II reclassification of cable. That would mean stricter, common carrier-style rules, particularly around cable broadband service, and could lead to pricing restrictions.
Wlodarczak cited a strong outlook for the business overall. “Cable is still the place to be, and even realistic worst-case regulation is not going to affect their results.”
Obama’s Nov. 10 bombshell did affect the stocks — the sector was down about 5% when he made his video announcement calling for Title II — but they rebounded almost as quickly. Within two weeks, the sector was back on its feet, having regained losses and then some and continuing on an upward trajectory.
The speed of the rebound surprised some analysts, but they said they also see it as proof of cable’s resilience in the face of a sluggish economy.
HEALTHY, WELL-VALUED
Their performance shows that although cable stocks may have “some warts on them, compared to some of the businesses around them they look much healthier and are much more attractively valued,” MoffettNathanson principal and senior analyst Craig Moffett said in November.
Satellite-TV stocks also soared, with Dish Network up 26.6%, fueled by a robust federal wireless spectrum auction, which helped boost valuations for the company’s wireless licenses, and optimism over its planned over-the-top video offering. Direc-TV, which in May agreed to be acquired by AT&T in a deal valued at about $48.5 billion, saw its stock rise about 26% over the past 12 months.
While distribution had a good year, the same could not be said for programmers, which for the most part saw declines in key stocks hit hard by ratings and advertising slumps. Overall, programming stocks rose about 3.4% for the year, but that was mainly due to a few names (The Walt Disney Co., Time Warner Inc., Madison Square Garden and HSN).
Wlodarczak added that fears over ad declines caused some programming investors to rotate out of that sector into the more stable distribution stocks.
