Even amid economic and regulatory uncertainties, several cable stocks are expected to perform relatively well in 2013, according to Wall Street analysts. The major drive for the stocks has been the continued persistence of affiliate fee pricing growth. Some potentially positive regulatory development could help too, they said. The differences in company performance reside in cost structure and international, at least for the programmers.

Discovery Communications (DISCA)

According to Bernstein Research analyst Todd Juenger, among the large cap media companies, Discovery Communications is his favorite pick. The programmer has the “perfect combination of low-cost/low-inflation programming which also happens to be in the sweet spot of audience appeal,” he said. The company has grown audience share 6 quarters in a row but has the lowest cost position of any programmer, he said. “Discovery can leverage this content globally, where it has the best distribution footprint, generating the most revenue per international household of any cable network group.”

Disney (DIS)
Disney is another “outperform” stock on Bernstein’s list, thanks to assets like ESPN. The sports net is “such a unique beast it cannot be compared with any other cable network,” Juenger said.  The certainty that comes with the long-term distribution agreements in place with Comcast and others—which lock in affiliate price increases that rise faster than the cost of its major sports deals—is unique in the industry, he said.  The recently announced TVE deals for Disney’s sports and kids nets will add another kick to affiliate fee growth. Internationally, no company stands in a better position to disproportionally benefit from the rising middle class, which is starting to spend money on entertainment.

Comcast-NBCU (CMCSA), Time Warner Cable (TWC) and DISH
While some investors have aired concerns over the potential for unfavorable regulatory change in the cable operator sectors in 2013, Wells Fargo Securities analysts think such concern is unwarranted. “For one, the current administration has actually been quite accommodating, having approved a number of significant transactions as well as loosening a number of requirements (cable ownership caps, cable-CLEC M&A, newspaper-TV cross ownership rules).”

Meanwhile, the analysts don’t expect much change in tone at the FCC even if there’s a new chair(wo)man. The analysts’ other predictions that would benefit these three operators: HSD doesn’t get Title 2 reclassification; the definition of MVPD might be broadened to include over-the-top; clarity on spectrum policy is likely to come more from M&A than from rulemaking (a positive for DISH); retrans consent is likely to remain a “market mechanism”; media ownership rules will eventually be relaxed; Comcast could win the Tennis Channel case; and finally, there will be no change to programming exclusivity clauses for RSNs.

A Caveat
Though things appear to be looking up for cable stocks, a major concern for the pay-TV industry is the prolonged macro-economic fluctuations in the US, according to a spokesperson at Zacks Investment, who noted that TWC lost 140K residential video subs vs. the 128k subs in the prior-year quarter. In the US, cable operators are facing fierce competition from telecom service providers, the research firm said, saying that Verizon and AT&T are quickly gaining market share from cable MSOs by offering fiber-based TV and broadband services. Moreover, online video streaming providers like Netflix and Hulu have become a “severe threat” to cable TV ops, they said.
 

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