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It's Time to Sell Cable Stocks
2/22/2013 8:30:00 AM
By: David Sterman
When Comcast (Nasdaq: CMCSA ) shelled out $16.7 billion this month to acquire the half of NBC Universal still owned with partner GE (NYSE: GE ) ,analysts suggested the deal would provide the nation's largest cable company with another path to growth.
Frankly, the deal is not about growth -- but survival.
Some serious clouds are beginning to form over the major cable companies, whichwill either need to alter their business models radically, or prepare for steady annual sales declines. From Intel (Nasdaq: INTC ) to Google (Nasdaq: GOOG ) to Netflix (Nasdaq: NFLX ) , competition is abounding.
Cutting the cord
Netflix of course has company. Hulu, Amazon.com (Nasdaq: AMZN ) , Aereo and others are making it so easy for consumers to watch TV shows and movies, that a decision to ditch cable services (and their expensive monthly fees) becomes easier with each passing year.
The Google end-around
Building out a national Internet access network would prove to be very expensive, but Google's efforts in Kansas City need to be seen as the first moves in a longer-term game. Cable companies operating in Kansas City are already feeling the heat,offering profit-sapping price discounts to retain customers. And they dread announcements from Google regarding additional cities.
Here comes Intel
There are many hurdles in Intel's way, so this initiative isn't really an endorsement of Intel'sstock . For example, many programming networks may be reluctant to alter their current profitable relationships with cable companies. And Intel has almost no experience in the area of consumer sales and branding.
But regardless of the relative success of Netflix, Amazon.com, Google and Intel with these moves, it is increasingly clear an expanding array of consumer choice will lead to ever greater pricing pressures for cable companies.
Let's take a closer look at Comcast as an example. Years of heavyinvestments in capital spending have only recently enabled the company to start reaping prodigious cash flow.
Comcast's ImpressiveFree Cash Flow
Yet it's important to remember that Comcast carried more than $40 billion in short- andlong-term debt at the end of 2012. This means robust free cash flow is crucial to help thebalance sheet from starting to buckle. (These figures don't reflect the early 2012acquisition of the remaining stake in NBC Universal though).
Although Comcast's Internet access customer base is stable for now (and not yet seeing any negative effects from Google's modest initiative), it's already possible to see the impact that companies like Netflix are having on the cable TV business. Comcast lost 459,000 video subscribers in 2011 and another 336,000 in 2012. The impending move from Intel into this space surely doesn't help.
Risks to Consider: As anupside risk, a firming U.S.economy may enable all of the companies in the media landscape to raise prices, which would offset some of the customer attrition.
Action to Take -->
Shares of Comcast have risen from $15 in early 2010 to a recent
$40, giving the company an eye-popping $110 billionmarket value .
In this time frame, shares of
Time Warner Cable (NYSE:
have more than doubled, as have shares of
Charter Communications (Nasdaq:
P.S. -- One stock has raised its dividend 33 consecutive quarters. Another has beaten the market by nearly 100 points in the past three years. And another has $9 in cash on the books... but trades for just $20 per share. Together, these stocks and seven others make up Elliott Gue's Top 10 Stocks for 2013. To learn more about all 10 of these stocks -- including several names and ticker symbols -- visit this link.
David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of INTC in one or more of its "real money" portfolios.