Comcast, Time Warner Cable Stock up More than 50% in 2012

By Robin Flynn

It has taken years of investor outreach — going back to 2002 when cable TV industry basic sub growth first turned negative — but the sustained cable share rally of 2012 has demonstrated conclusively that investors have accepted and even embraced an industry that loses basic video subscribers while revenues grow at a stable pace and margins remain intact.

Thanks mostly to the fast-growing high-margin high-speed data and commercial service segments, revenues and cash flow are increasing at a mid-to-high single-digit pace for most major MSOs despite negative basic sub trends and rising programming costs (Cablevision Systems Corp. and Mediacom Communications Corp. are exceptions on the revenue side). Barring any major downturn in housing growth or the economy, these trends are expected to carry on into 2013. These trends, as well as confidence in the ability of cable MSOs to keep innovating to stay competitive, has led to a strong vote of investor confidence in the sector.

Shares of Comcast Corp. and Time Warner Cable Inc. have seen the highest gains, up 58% and 51%, respectively, through Dec. 17, followed by Charter Communications Inc. at 24% growth. Cablevision is up just 5% through Dec. 17 due to concerns about revenue growth, ability to raise rates and competition. Over a three-year span, Comcast shares are up 119% and Time Warner Cable shares are 125% higher.

As shown in our table below, as of Dec. 17, cable shares were trading at a weighted average multiple of 6.9x cash flow and almost $5,000 per basic subscriber (a number that benefits as subscribers slip but revenues grow). That compares to an average trading multiple of 5.3x in November 2009 and a weighted average trading value per basic subscriber of just over $3,000. Comcast subs traded at just $2,757 each then, versus $5,391 now.

Several factors explain the value increase. The overall stock market and general investor sentiment are both stronger, as the Dow Jones reached 13,235 on Dec. 17 (up 100 points after news of encouraging progress in the fiscal cliff talks in Washington), compared to 10,308 on Dec. 17, 2009. The cable TV system deal market has also improved considerably: In the first 10 months of 2009, the average deal cash flow multiple was just 5.5x, lower than 7.9x in the same period of 2012. But the fact that investors have grown comfortable with a business trending more toward data than video is the biggest difference in the value benchmarks in the public market.

An analysis of Comcast's metrics illustrates this shift, since Comcast has grown primarily organically compared to growth via acquisitions. As our table below shows, between the third quarter of 2009 and the third quarter of 2012, Comcast has lost 7.4% of its sub base, or 1.8 million basic subs. Despite that loss, third-quarter revenue is 19% higher than in the third quarter of 2009, and the reported margin is slightly higher as well, propelled partially by the 3.3 million HSD sub gain. The share price, at a $37.54 close on Dec. 17, is 119% higher than the close of $17.11 on Dec. 17, 2009. Capital returns are also higher today, as Comcast is paying a 16.3 cent-per-share dividend compared to the 6.8 cent level of 2009, and there are fewer shares outstanding.

Comcast shares as of Dec. 17 are very close to the 52-week high of $37.96, indicating a building confidence level that similar growth will take place next year. Cable execs are not counting on a housing rebound or a significant uptick in new occupied housing growth in their outlooks. Despite favorable press about the housing market, cable execs have recently said they generally have not seen signs of a strong recovery yet, even though things are better. Should that turn around, the improved housing formation would be an additional tailwind to add to those already propelling cable shares forward.