The economics of cable companies can create opportunity for investors. The initial capital required to establish the network is significant, but once created, little cash is required to keep the business running allowing the company to reward shareholders with relatively safe dividends.
The media and entertainment industry is experiencing a favorable climate, with heavy investments seen in Internet-enabled TV models. Though TV ownership has dropped for the first time in three decades, viewership has increased by 22 minutes per month. This is mainly the result of higher-quality video streaming through mobile devices and the Internet, which downplay the need to own a TV set.
Which Cable Company should be in your Lineup?
Let's have a look at the prospects of the three main players in the industry:
Div & Yield:
28.09 - 42.00
42.87 - 55.17
Time Warner Cable
73.52 - 102.00
* Closing price as on March 14.
Comcast Corporation (CMCSA), founded in 1963, has its headquarters in Philadelphia, Pennsylvania. The company operates as a worldwide media and technology company through its Cable Communications, Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks segments. Comcast demonstrated a strong fourth quarter with significant growth across all segments. Even the Pay-TV subscriber segment, which has been a struggle for both this company and its competitors, registered comparatively less subscriber loss when compared to 2011. Moreover, Comcast gained an impressive 350,000 broadband subscribers in the fourth quarter. In just five years, Comcast has doubled its revenue, with an effective average annual growth of 15.16%. It is expected that the company will continue at the same growth rate, backed by the success of NBC and the content segment of Comcast.
The future outlook also looks brighter for the company, with the positive trend in broadband services likely to continue. Comcast also has the potential to gain from its Xfinity Streampix services, by promoting High Definition and DVR videos. The company is also planning to transform into a digital platform by offering promotional offers to all analog subscribers, which will help it save significant bandwidth and result in high profitability (factoring higher margins in digital services). This will allow the company to raise prices and drive future growth.
Time Warner Cable Inc (TWC), based in New York, provides video, high-speed data and voice services to residential and business service customers. Until December 31, 2012, the company served approximately 15.2 million customers; however, it lost 129,000 subscribers in the fourth quarter and added only 75,000 new subscribers to its residential-broadband business compared with 117,000 a year ago. Time Warner's profits for the latest quarter declined to $513 million, or $1.68 a share, from $564 million, or $1.75 a share, a year earlier. However, the company raised the dividend from 56 cents a share to 65 cents. The cable company's revenue benefited most from its residential services, which increased 6.8% to $4.58 billion. But when excluding the revenue of Insight Communications and some other acquired cable systems, residential services revenue grew only about 1% to $4.3 billion.
The company's 2013 outlook includes an expected 10% increase in programming costs, in addition to growing competitive threats from telecom, satellite TV and online video streaming operators. Also, the high-margin political advertisements are expected to be significantly below the prior election year's level, which will squeeze the operating margin by 0.5-1% in 2013. Moreover, the company expects its 2013 adjusted earnings per share to grow by 10-14%, which is well below analyst expectations. The multi-channel video market in the U.S is almost saturated, forcing cable companies to rethink their business models. Time Warner, like its closest competitor Comcast, must diversify from a pure-play pay-TV operator and broadband service provider to more of an integrated content developer and TV distribution company.
DIRECTV (DTV), founded in 1990, is based in El Segundo, California. The company provides digital television entertainment in the United States and Latin America by acquiring, promoting, selling and distributing digital entertainment programming primarily through satellite to residential and commercial subscribers. During 2012's fourth quarter, DirecTV acquired an impressive number of more than 100K subscribers in the U.S., bringing the year's total added net subscribers to 200K. In Latin America, the company added more than 650K net subscribers, though that market is still immensely untapped unlike its U.S. counterpart, which is close to saturation. This offers a huge opportunity for the company considering a major portion of the Latin American is a middle market consumer preferring value-offering products. DirecTV will be a perfect fit for the market based on these considerations, and it expects about 20% of its 2013 revenue to come from Latin America. During the last quarter, DirecTV posted a profit of $942 million, or $1.55 a share, up from $718 million, or $1.02 a share, a year earlier. Revenue for the quarter grew by 7.9% to $8.05 billion. The board also announced a new $4 billion buyback program.
To address the issue of a nearly saturated U.S. market, the company plans to invest $2 billion in capital expenditures in the coming year, aimed at improving its U.S. satellite facilities and upgrade programs. For the next three years, the company expects a mid-single-digit growth in revenue in the U.S., driven by an increase in revenue per user rather than subscriber growth.
Among all three companies, the best one to invest in will be Comcast, considering the success of NBC and the content segment of Comcast, which will drive the growth of the company. The company's transformation into a digital platform will also help to mold the company for future success.
DirecTV is also a good investment, but compared with Comcast, carries more risk. Since DirecTV is a small company, it might not be able to weather unforeseen crises the way its larger competitor could.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Black Coral Research is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.