After moving lower last week, many cable companies appear rather cheap, but new government regulations could impact long-term growth, according to some analysts. Over the past five trading days, the broadcasting and cable television segment is trading nearly 8% lower, compared to the S&P 500 benchmark trading around 4% lower.
Cable stocks appear to be trading at relatively cheap levels with strong near-term fundamentals, according to Barron’s columnist Eric Savitz. The technology trader points out that the industry’s capital spending is falling, resulting in higher cash flows, which are likely to be used to bolster dividends or share buyback programs as well as to repay debt.
But, some analyst firms like Bernstein disagree and downgraded the sector, saying that potential price regulation alters the industry’s fundamentals and could impact long-term growth rates. Bearish investors argue that new regulations could give regulators control similar to those already seen in the telecom industry, and facilitate increased competitiveness within the sector.
Last week, FCC Chairman Julius Genachowski announced plans to adopt new rules designed to keep the internet open and free from interference from companies that provide access to customers and businesses. So far, only limited information about the proposals has been circulated, saying that rules would be designed to prevent service providers from hindering traffic and blocking access to certain web sites.
Internet providers criticized the decision as unnecessary and potentially costly, even suggesting that they would move to reduce their investment in their networks. However, the FCC is still far from acting and has yet to conduct hearings on the matter. Many analysts believe that the FCC will face an uphill battle by carriers that should keep any regulations to a minimum.
In the meantime, the sector is likely to remain cheap until more information about the proposed regulations surfaces. As a result, the sector could be regarded as cheap by some investors, but may also be at risk of future regulation that could hinder growth if new rules are adopted.
Disclosure: No positions.