Pay TV was not a great bet against the recession in 2008, but with cable and satellite shares near all-time lows and their capital spending also dropping, the sector could be a safe haven this year.
The shares of pay TV companies, including Comcast Corp and Time Warner Cable Inc tarnished their "recession resistant" reputation last year , losing about a third of their value since September when the banking crisis exploded and investors fled the stock market.
Yet, cable and satellite service providers now hold the promise of strong free cash flow growth as they retain old customers but spend less on deploying set-top boxes and digital video recorders due to a fall in new subscriber growth.
Bernstein analyst Craig Moffett said investors have been overly bearish on cable and have overlooked the likelihood of a higher free-cash-flow-yield per share in 2009 of 9 percent to 15 percent, as share prices have fallen.
Comcast, the largest U.S. cable company, is expected to generate around $3.63 billion in free cash flow in 2008, while No.2 Time Warner Cable will have around $1.98 billion, according to Bernstein.
Free cash flow is a measure of cash generated by the business after accounting for all the cash spent on operations. Cable investors have traditionally focused on cash flow to value the business because operators were investing capital heavily in rapid expansion, new technology and services.
Now, as that expansion slows, investors will be hoping for a return of cash via dividends or stock buy-backs, but the wider market downturn has distorted that promise due to a lack of visibility, Moffett said.
"Strikingly, the dramatic recent ramp in free cash flow has been met with decline in share prices ... leaving cable's free cash flow yield at all time highs," he said in a note to clients.
NOT RECESSION PROOF
Before the mortgage crisis worsened into a full-fledged financial crisis, some cable investors viewed pay-TV companies as "recession proof," arguing that in tough times, Americans would stay home to watch TV rather than go out to theaters and restaurants.
But there is plenty of evidence to the contrary: executives such as Time Warner Cable's Chief Executive Glenn Britt has warned of a drop in the rate of growth in the fourth quarter.
There are good reasons for a slowdown as fewer people move to new homes and many consumers curb discretionary spending on premium channels such as HBO or additional DVRs in the home.
Wall Street argues that, even in a difficult market, not all pay-TV operators are in the same boat. Cable companies, which offer triple-play packages of video, Internet and home telephone services, are likely to be affected more than satellite companies by a shift in consumers opting to cancel landlines and rely on solely on cellphones.
"It seems a little bit unclear across the space how recessionary resistant the pay-TV market will be," said Thomas Eagan, an analyst at Collins Stewart.
Eagan said Time Warner Cable has guided investors' expectations toward a pull-back in subscriptions sold during the fourth quarter, but DirecTV Group said it will add more than 200,000 customers in the period.
Barclays Capital analyst Vijay Jayant expects pay-TV companies to sell fewer new services in 2009 overall "as voice line losses to wireless substitution outstrip continued broadband growth and modest video subscriber growth."
This all means average monthly revenue per user (ARPU) will also likely face pressure in 2009 as competition for customers between cable, satellite and phone companies increases.
Anecdotally, analysts and customers report that more cable companies are offering one to two-year extensions on promotional introductory packages.
Barclays expects pay-TV ARPU to grow 4.2 percent in 2009, compared with 5.6 percent in 2008. Jayant said this would be below the rate of programing cost increases for these companies.
Time Warner Cable reports results on February 4, while Comcast will report on February 18.
