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Comcast, Time Warner Cable Shares Surge on Broadband Potential
April 29 (Bloomberg) -- Comcast Corp. and Time Warner Cable Inc. are proving themselves much more than just cable guys.
The U.S.'s two largest cable television companies reported better-than-expected earnings this week, sending their shares surging, largely on the strength of their Internet businesses. The companies added nearly twice as many broadband customers in the first quarter as the combined total for Verizon Communications Inc. and AT&T Inc.
The cable companies also reaped more revenue on average from their TV customers, alleviating concerns that pinched consumers would hurt their core business. Time Warner Cable climbed as much as 8.4 percent, the most in a year, while Comcast rose 6.8 percent, the most in five months.
"People have fundamentally misjudged the cable stocks for years," said Craig Moffett, an analyst with Sanford C. Bernstein in New York. "The demand for Internet bandwidth is increasing by leaps and bounds each year, and cable operators have the premier infrastructure in the U.S."
In almost 60 percent of the U.S., cable operators have no competition or compete only against the phone companies' older, slower DSL technology, making the cable companies the only option for those who want to surf the Web at high speed, according to Bernstein data. Comcast Chief Executive Officer Brian Roberts and Time Warner Cable's Chief Glenn Britt have both increased marketing of their high-speed Internet services and cited their growth potential.
"It's really up to cable to exploit their advantage in broadband, because that's certainly where the growth is," said Jim Goss, an analyst at Barrington Research Associates in Chicago. "We've seen that this quarter."
Falling Basic Subscribers
Investors have focused on the companies' falling basic video subscribers and the threat Internet video services pose to that business, Goss said. What investors overlook is that the same person who cuts their cable cord most likely is also adding a high-speed Internet line, he said.
"There is a real flight to quality for speed and Internet access in the U.S.," Roberts, 50, said in a Bloomberg Television interview yesterday. "Consumers want the best broadband products they can get."
One risk to cable's Internet strategy is the U.S. Federal Communication Commission and whether it decides to take a more aggressive approach on regulating the Web, said Moffett. The FCC is debating whether to reclassify the Internet in a way that would give it more authority over how cable operators run their broadband businesses.
'Profound Implications'
"A new designation would be the first step toward making cable a regulate monopoly, and that obviously would have profound implications for valuation," said Moffett. "All bets for the industry would be off."
Jen Howard, a spokeswoman at the FCC, declined to comment on the agency's intentions on a possible reclassification.
Cable customers are also showing some willingness to spend more on added services, like pay-per-view programming and high- definition TV service.
The average monthly video bill of a Comcast customer is $123, a 6.3 increase over the previous year. Time Warner Cable's subscription revenues also increased 4.9 percent to $4.4 billion in the quarter, mainly through price increases and by selling additional services.
Increased cash flow and declining capital expenditures may foreshadow more dividends and share buybacks, analysts said.
'Cash Geysers'
"All of these companies are sitting on top of cash geysers," said Bernstein's Moffett. "The need for reinvestment in the physical plant is on the decline and so they're generating a huge amount of free cash flow and suddenly their falling over themselves to see who can return it to shareholders the fastest."
Time Warner Cable instituted a 40 cent quarterly dividend in the fourth quarter and Comcast raised its dividend by 40 percent to 9.5 cents in the same period. Comcast repurchased 19.2 million shares in the first quarter.
"While it's not clear whether we're entirely out of the woods on the economy, we are cautious and optimistic and are clearly executing better in this environment and against the competition," Roberts said on the company's conference call yesterday.
Britt echoed his statements.
"Through a combination of product enhancements and more effective marketing, we've grown confidently, even in the face of more expressed competition from satellite and telephone companies," said Britt on the company's conference call today. "We're off to a great start."
Time Warner Cable rose $3.73, or 7 percent, to $56.86 at 2:55 p.m. in New York Stock Exchange trading, while Comcast increased $1.21, or 6.4 percent, $20.02 on the Nasdaq.
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