[Nettime-bold] THE RAGAS REPORT - Cable Stocks

This Week's Commentary

Cable Stocks - The Kings of the Couch Potatoes

Digital cable. Video on demand. Cable telephony. High-speed Net access. Interactive programming guides and interactive TV.

Combine this bevy of next-generation services with reliable monthly cable TV subscriptions and one can see why Wall St. is head over heels for supposedly "recession proof" cable stocks in the very "unpredictable" current tech sector.

Now that many fast growing dot coms and Net software companies have imploded, the consistent 10-12 percent annual sales and cash flow growth of most cable operators look downright appealing. Words like "consistency" and "reliability" look quite attractive once again.

While most tech blue chips are still down 50-60 percent from their old highs, cable stocks have held up incredibly well during the NASDAQ meltdown. In fact, many large cable names are now trading near their 52-week highs.

So do cable stocks have further to run still or have they already run out of gas? For me at least, it's an interesting question that definitely begs further investigation.

Thus, I placed cable giants Comcast, Cox and Charter under my analytical microscope for the week to see what I could find out. Let's take a closer look.

Cox Communications [COX]

Atlanta based Cox Communications is currently the nation's fifth largest cable operator with over 6.2 million customers and is a majority owned subsidiary of media giant Cox Enterprises. After removing unusual items, Cox recently reported a first quarter loss of $125 million or $.21 cents per share, compared to earnings of $.30 cents during this same period last year.

While earnings declined for the quarter, Cox's operating cash flow jumped nicely 10% to $358 million in the quarter. First quarter pro forma sales rose 12% to $948 million during the period. In addition, Cox continues to capture additional revenue streams, with the cable operator adding 271,000 new digital cable, digital telephone or broadband cable subscribers during the quarter.

More importantly, Cox re-affirmed on its latest earnings conference call that it still expects to post 2001 revenue growth of 14-16 percent and operating cash flow growth of 12-13 percent for the year. At a recent price of $44 per share, though, Cox is already trading within only a few points of its current 52-week high. Cox shares need to dip further before I'd start looking closer.

Charter Communications [CHTR]

Formed through a series of frenzied deal making from Microsoft co-founder Paul Allen, Charter is now the fourth largest operator of cable systems in the U.S. With over 6.4 million customers, Charter now has customers in over four states. The company has been extremely aggressive in offering next-generation digital services.

Charter recently reported first quarter pro forma sales that rose 14% to $873 million with operating cash flow surging almost 10% to $388 million during the same period. Charter now expects to have 2 million digital cable customers and between 550,000-600,000 broadband cable customers by the end of 2001. Upon the close of some pending deals, Charter's customer base should grow to over 7 million in the next few months.

Much like Cox, Charter used its recent conference call to re-affirm its existing guidance for 2001. Operating cash flow is still expected to grow 12-14 percent with annual sales growth of 14-16 percent. Charter shares would look particularly attractive to me right now except for the fact that the company currently carries $13.7 billion still in long-term debt and that Paul Allen has not yet proven to be a savvy operator.

Comcast Corporation [CMCSK]

Unlike Cox and Charter, in addition to owning cable systems, Comcast is also the majority owner of electronic retailer QVC, a variety of cable TV channels and sports teams like the Philadelphia 76ers. On the cable side, Comcast is currently the third largest cable operator in the U.S. with over 8.4 million customers.

Earlier this week, the company reported impressive first quarter results with consolidated revenue growing 13% to nearly $2.2 billion and operating cash flow rising 9% to $640 million for the period. The cable side of Comcast continues to look strong with sales rising almost 9% during the period. Comcast now has over 1.5 million digital cable customers.

Comcast has also not backed off of its sales and earnings guidance for 2001. The firm expects to see revenue growth of between 10-12 percent for the year with operating cash flow rising 12-13 percent (up from previous guidance of 10-11 percent). While Comcast is already trading near its 52-week high at a recent price of $42, this looks like one well-run cable name with more room to run still.