Morgan Stanley Analyst Plugs 2003 Cable Values

BY MAVIS SCANLON Will cable stocks finally get some respect this year? Commenting to The New York Times last week, Morgan Stanley analyst Richard Bilotti predicted that cable companies would see higher strategic values than content companies in 2003. Underlying the shift are three main themes, he said. First, despite big cable companies being drastically undervalued, they are finally seeing revenue from selling value-added services to existing customers. Second, content companies have never before had to deal with a company of the size and scale of Comcast. And third, cable operators are seeing better returns on invested capital. While the big content companies such as Viacom and Disney are seeing returns on invested capital of 3% to 6%, cable companies are seeing returns as high as 20%. After a year in which Wall Street turned overwhelmingly negative on cable stocks, investors may need some prodding to look at cable. On that note, several catalysts are on the horizon that could pique Wall Street’s interest. An IPO of Time Warner Cable, for example, would be cable’s first in a while, says Stifel Nicolaus analyst Ted Henderson, and would give TWC the currency for acquisitions. Another round of consolidation in the industry in 2004 would be a catalyst. Yet another would be Comcast’s successful integration of AT&T Broadband. “If Comcast can improve margins over a 12-month period that would also be a catalyst,” Henderson says. Still, as UBS Warburg cable and satellite analyst Aryeh Bourkoff pointed out in a research note Friday, the general market could be affected by several looming issues, including military action in Iraq and North Korea, the health of the economy and the pace of earnings growth. In the cable space, Bourkoff said, the fight for market share will continue to be expensive. Last year, subscriber losses at AT&T Broadband and Charter — driven by defections to DBS services — caused an overall 1.1% decline in its subscriber base, while satellite’s overall numbers grew by 12.6%.