How You Should Play These Cable Stocks In 2013

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Includes: CMCSA, DISH, T
by: Fusion Research

In spite of the sluggishness in last few years, the U.S. cable industry has grown steadily. This was mainly due to the exceptional growth in high speed Internet and video subscriptions and expansion in the commercial segment. Moving into 2013, the steady growth in the U.S. housing industry will further support the growth in the U.S. cable industry. The construction of new homes means more connections of high-speed data or video services. It will be further benefited from the expansion in the commercial segment and growth in high-speed data subscriptions in the coming years.

The commercial sector that provides services to the business enterprises will grow at a faster rate with around 20% growth in 2013. To encash the same, Comcast Corporation (NASDAQ:CMCSA) is concentrating on the small and medium businesses in order to maintain its growth rate whereas DirecTV (DTV) has been focusing on high-speed data services expansion in the U.S. and overseas markets. On the other hand, approval from FCC may increase Dish Network's (NASDAQ:DISH) spectrum assets in the coming years. Let's have a look at these companies in detail.

Comcast Corporation

Comcast reported solid quarter four results for 2012. The company's net earnings grew tremendously by 18% to $1.52 billion or $0.56/share as compared to $1.29 billion or $0.47/share in the same quarter of the previous year. This tremendous earnings growth was supported by growth in the company's internet service and broadcast operations.

Expansion with acquisition

Comcast bought 51% stake in NBC Universal from General Electric Co. (NYSE:GE) for $13.8 billion a couple of years ago. Continuing the push, Comcast has bought the remaining 49% of General Electric's stake in NBC Universal for $16.7 billion and will invest another $1.4 billion for other assets. This deal is expected to close in the month of March, 2013. This deal is beneficial for both the parties as General Electric will receive cash for selling its stake and may initiate its buyback plans during this financial year for $10 billion. It will also continue to expand its more profitable industrial business. Whereas Comcast will get higher benefits from the ever increasing prices of TV programs and sports rights. With this acquisition, the company will control the NBC television network, TV production studio, the Universal movie studio, Universal theme parks and the Telemunda Spanish language network in Florida and Los Angeles. This acquisition may bring solid organic growth in revenue and increase its operating earnings by ~8% annually over the coming years.

Furthermore, with huge cash in hand Comcast will increase its dividend by 20% to $0.78/share and may repurchase shares worth $2 billion. More capital injection in share repurchase will decrease the total number of shares outstanding and ultimately bring benefits for the shareholders. As per the company's guidance, Comcast will increase its capital expenditure by 10% on Cable and 25% on Content during this financial year. Therefore, I recommend a buy for this stock expecting ~2.1% growth in EBITDA.

DirecTV

DirecTV reported its 4Q12 results with huge growth in revenue and earnings. The company reported ~31% growth in earnings to ~$942 million or $1.55/share as compared to the previous year, whereas its total revenue boosted up by ~8% to around $8.05 billion. The main drivers in its earnings growth was the increase in its subscriber numbers in Latin America (Latam) and the U.S. Latam has added around 658K subscribers whereas the U.S. added 103K subscribers during this quarter.

Huge capex in both Latam and US

Tremendous growth in the subscription rate in both Latin America and U.S. has made the management more focused in both these regions. The company has announced to invest around $4 billion in these regions in order to boost up its earning in the coming years. During FY2012, DirecTV has added around 10.3 million subscribers (excluding sky Mexico) in Latam. Looking at future growth prospectus in Latam, the company will come up with a capex of ~2 billion in Latam during this financial year. DirecTV has been performing well with its prepaid and middle market products and this capex may boost up its revenue by 20% in 2013.

With outstanding subscription growth in the U.S. during 2012, the company will also invest around $2 billion in the U.S. as this region contributes around 78% to the total revenue. The company has added a total of 196K subscribers during this year and additional capex in the region will further enhance customer experience and ultimately boost up its revenue. This capex will include upgradation of infrastructure facilities too.

Expansion in Brazil

DirecTV has also been focusing on the emerging markets to boost up its overall market share. Recently, the company has shown its interest in acquiring GVT, a business unit of Vivendi's Telecom. Brazil is one of the fast emerging economies with 120 high growth potential local markets. The rationale behind targeting Brazil is that DirecTV already owns a majority stake in Sky Brasil, a TV operator in Brazil. This acquisition may create promising growth opportunities for DirecTV as it is already familiarized with the Brazilian market. I believe there are good synergies as both GVT and Sky Brasil will have complementary line of businesses. Though, the company management has not completed its internal review till date about this acquisition but, this news has been drawing the investors' attention towards the stock of DirecTV.

Looking at its massive expansion plans along with the announcement of buyback of shares worth $4 billion in this financial year, I recommend a buy for this stock.

Dish Network Corp

Dish has been acquiring spectrum assets steadily over the past few years in order to increase its total portfolio of spectrum assets. A couple of years ago, Dish took over the wireless service providers namely, TerreStar Networks Inc. and DBSD North America Inc. The company had invested around $3 billion on these two acquisitions and expected to get 40 MHz of satellite spectrum. Furthermore, the Federal Communications Commission (FCC) has given a green signal to Dish for building a cellular network which will further expand its spectrum assets. With this approval, Dish will build its private LTE network in the future and give tough competition to its major rivals including Verizon Communication Inc. (NYSE:VZ). But, this network building proposal requires huge investments along with marketing partners. In order to build a network with fewer investments, Dish may focus on its deal with Clearwire.

Recently, Dish has shown its interest in Clearwire's (CLWR) spectrum assets. Dish shall buy around 24% of spectrum assets of Clearwire for $2.2 billion and therefore Dish's wireless network will be built and managed by Clearwire. Dish is also offering to pay $3.30/share in cash to outstanding shareholders of Clearwire. This offered share price is around 11% more than the existing offer from Sprint (NYSE:S) which is the biggest hurdle for this deal.

Sprint has owned more than 50% of Clearwire and there are numerous agreements between both the companies. This is a significant factor which is obstructing the offer from Dish Networks. However, several major shareholders and hedge funds are taking the offer by Dish seriously. But again, this deal's approval requires a green signal from Sprint. If the offer of Dish is approved, Dish will get an almost fully built network of Clearwire along with additional spectrum. If not, Dish might sell its spectrum. Currently, I recommend a hold stake for the stock of Dish Networks, till we get more information on this deal.

Conclusion

The cable industry can be a good addition to an investor's portfolio looking at its steady performance in the past. The two companies Comcast and DirecTV will provide good returns to its shareholders considering their expansion as well as growth plans. Comcast Corporation has performed pretty well to-date and further expansion through acquisition shall boost up its market share drastically whereas DirecTV's capex plan in both the U.S. and Latam may boost its earnings in the coming years. Hence, I recommend buy for both the stocks.

However, I remain skeptical on Dish Networks until any further clarification on the deal is provided. FCC's approval for Dish is drawing the market's attention but again keeping away investors from the undisclosed response of Clearwire's deal. Therefore, I recommend hold for this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.