Investors, fearful of the long-term consequences of Internet-based content providers, may have shied away from paid-TV stocks like Time Warner Cable Inc (NYSE:TWC), Comcast Corporation (NASDAQ:CMCSA), and Cablevision Systems Corporation (NYSE:CVC).
If that’s the case, they’ve missed out!
Since last December, Cablevision Systems Corporation (NYSE:CVC) shares are up a staggering 40%, while Comcast Corporation (NASDAQ:CMCSA) is up nearly 23% and Time Warner Cable Inc (NYSE:TWC) has rallied about 22%. These gains are even more impressive considering that the industry is a relatively mature one.
But is too late for investors to get in? Despite the gains, there could be further upside from here.
Cord-cutting: a phantom trend?
In theory, the paid-TV providers are in trouble. With services like Netflix, Amazon Prime, and Hulu offering tons of content online, the days of paying exorbitant cable bills are over.
Or are they? Although there are signs that more people are ditching cable, it might be because they simply can’t afford it.
Cable analyst Craig Moffett has argued that the people ditching cable aren’t running to Netflix — they’re making do with over-the-air networks.
One trend that’s undeniable is “cord-nevers” — American consumers in their 20’s who aren’t just ditching cable, they’re never buying it to begin with. Yet, when one considers that this group of consumers is struggling with student loans and a weak labor market, their reasons to avoid cable might be rooted in their wallets.
But while some consumers may be ditching cable because they can’t afford it, the cable companies are still doing quite well.
Comcast Corporation (NASDAQ:CMCSA) reported an impressive quarter earlier this week, blowing past analyst estimates. Operating income jumped 11.6% and revenue rose 7%. Comcast’s cable and Internet services continues to be a cash cow for the company, showing no signs of subscriber loss.
Time Warner Cable Inc (NYSE:TWC) posted similar results. The company lost 80,000 subscribers, but was better able to monetize the subscribers it kept, and its earnings rose 6%, crushing analyst estimates.
Likewise, Cablevision Systems Corporation (NYSE:CVC) lost subscribers, but its earnings rose. On a year-over-year basis, earnings doubled, but much of that was due to a litigation settlement.
An industry on the verge of consolidation
But investors likely don’t care about Cablevision Systems Corporation (NYSE:CVC)’s loss of subscribers — many see it as an acquisition target. Hedge fund manager John Paulson owned some 16 million shares of the company at the end of March (up about 40% from the prior quarter), and he appears to be banking on a takeover.
At CNBC’s Delivering Alpha conference, Paulson argued that Cablevision Systems Corporation (NYSE:CVC) was a natural target to any would-be cable consolidator. The company is a relatively small player, and could be easily gobbled up.
The problem is that it’s a family-owned company. The Dolan family continues to own and run Cablevision, and if they don’t want to sell, the company isn’t getting sold. But during the company’s earnings call, CEO James Dolan remarked, “never say never” when asked if the company would sell itself, leading many to assume that the Dolans were open to a sale.
Time Warner Cable Inc (NYSE:TWC) has also been viewed as a takeover target. Liberty Media’s Chairman John Malone, through his stake in Charter Communications, has been rumored to be preparing a bid for Time Warner.
Charter might actually merge with Cox Communications instead. Cox is a private cable company, and while that could lessen the impetus to buy Time Warner, it could actually make it more likely down the line.
Malone has said he wants Charter to become an “acquisition machine.” But given that it remains a small player, buying a big company like Time Warner Cable Inc (NYSE:TWC) could be difficult.
But by merging with Cox, Charter might just become large enough to buy Time Warner.