Cable Faces Crossed Wires

11/30/2015


Traditional TV usage has tumbled among younger U.S. viewers, prompting concerns the cable industry has entered a structural decline. Rising housing costs have squeezed discretionary income, while many Americans seem content with online alternatives offered by Amazon.com ($671; AMZN), Netflix ($123; NFLX), and Hulu.

Pay-TV providers shed a net 357,000 subscribers in the September quarter, according to industry researcher MoffettNathanson. That's more than twice what they lost in the year-ago quarter but an improvement from the 605,000 decline in the June quarter. Comcast ($62; CMCSa) reported net video losses of 48,000 subscribers, versus a net loss of 81,000 in the September 2014 quarter.

Other types of media face their own troubles. Viacom ($51; VIAb) is battling weak ratings across many of its networks, including Comedy Central, MTV, and Nickelodeon. Mounting subscriber losses forced Disney ($118; DIS) in August to temper long-term expectations for its cable-network business, which includes Disney Channel, ESPN, and A&E. Disney's cable business (32% of sales for fiscal 2015 ended September, 46% of operating income) generated 10% higher sales in the past year, though higher programing costs crimped profit margins.

Yet there is still hope for the cable industry, considering an estimated 10 million U.S. homes subscribe to internet services but not cable. Media companies hope to tap into that market by distributing their cable networks on nontraditional platforms.

• Time Warner Cable ($184; TWC) is testing a streaming TV service in New York with a full bundle of channels.

• Disney has agreed to stream a smaller bundle of channels through Sony's ($27; SNE) PlayStation video-game console.

• Dish Network's ($63; DISH) online TV service includes ESPN and a handful of other cable channels for $20 a month.

• Disney has partnered with Netflix to produce multiple TV series featuring its Marvel characters.

There is also the direct-to-consumer route. Earlier this year, Time Warner launched a stand-alone streaming version of HBO; Viacom did the same for Nickelodeon. Disney is also introducing a subscription streaming service called DisneyLife in the U.K., potentially reducing its reliance on Netflix.

Meanwhile, both Charter and Comcast are reportedly exploring expansion into the wireless business, while Comcast has invested in digital-media companies BuzzFeed and Vox.     

Cable companies appear to recognize that they must adapt their business models to fit new consumer trends to remain viable. But the picture remains fuzzy on whether their array of alternative options will gain enough traction to offset the decline in the traditional cable business model. Comcast is a Focus List Buy and a Long-Term Buy. Disney is a Long-Term Buy. Amazon.com and Viacom are rated B (average).

FORECASTS' MEDIA STOCKS
12-Month
--- Change ---
Est. 12-
Mo. EPS
Growth
(%)
---- P/E Ratio ----
YTD
Total
Return
(%)
Quadrix
Overall
Score
Company (Price; Ticker)
EPS
(%)
Sales
(%)
Trailing
Estimated
Forward
Rating
21st Century Fox
($30; FOXa)
37
(17)
11
17
16
(18)
61
B (average)
Comcast
" ($62; CMCSa)
4
7
10
19
18
8
88
Focus Buy *
Disney ($118; DIS)
19
7
10
23
21
26
81
L-T Buy
Time Warner
($70; TWX)
11
4
8
15
14
(17)
79
B (average)
Viacom ($51; VIAb)
10
(4)
7
9
9
(31)
78
B (average)
Note: Quadrix scores are percentile ranks, with 100 the best.     * Also a Long-Term Buy.

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