Cablevision Misses Rally

Right about now, Cablevision Systems shareholders may well be asking: What have you done for me lately?

After running up 23% in the fourth quarter, from $69 to $84.94, shares of Cablevision are flagging following UBS Warburg analyst Tom Eagan’s decision to downgrade the stock to a buy from a strong buy. At midday Thursday, Cablevision traded at $80.44, down $1.38, or about 1.7%.

The negative reaction to the downgrade was not even stemmed by Wednesday’s interest rate cut announcement. A monster rally resulted from the Federal Reserve’s dramatic reduction in the Fed funds rate – the rate banks use for overnight lending – to 6% from 6.5%. The Nasdaq Composite Index jumped 14.1% in its best trading day ever, while the Dow Jones Industrial Average gained nearly 3%.

Most cable stocks joined the party. Charter Communications and Adelphia, the most highly leveraged names of the group, rallied the most. Charter gained 10% to $22.50, while Adelphia gained about 3% to $49.06.

Over the past few months, excitement built up among Cablevision analysts and investors over expectations the company would sell a large portion of the assets in its Rainbow Media Holdings group rather than spin them off as a tracking stock.

Eagan raised his price target for Cablevision in September, saying the spinoff would be a catalyst for the shares. It was. The stock came close to eclipsing its 52-week high of $86.87, hit Jan. 21.

Now, "while the company’s fundamentals remain strong," Eagan wrote in a note to clients, "we see the completion of the Rainbow transaction (in either a sale or the issuance of a tracking stock) as removing a major catalyst for the stock."

The share price decline "probably has to do with some uncertainty over how the Rainbow spinout" will shake out, says Gary Farber, an analyst at SG Cowen Securities.

Eagan has maintained his $88 price target on the stock, which is about 9% above current levels.

With or without Rainbow, Cablevision is in good shape, with a cable plant that is highly upgraded, a coveted subscriber base in the New York area and a well-regarded portfolio of local content assets.

If Cablevision garners a good price for Rainbow, its shares may pop somewhat, Farber says.

New catalysts for further share price improvement would include better-than-expected results in Cablevision’s broadband or content areas, Eagan says, or "a deal struck for Rainbow that’s higher than we expect," he says.

There is little downside for Cablevision at this point even if they decide to spin off Rainbow rather than sell it, Farber at SG Cowen says. The thing to keep in mind, he says, is that Cablevision management has always gotten top dollar for its assets.

While Cablevision’s net losses are expected to continue into at least 2002 due to its continued capital outlays for upgrades and investments in new services, its cash flow is expected to jump this year.

Analysts polled by First Call expect Cablevision to grow its cash flow to $7.45 a share this year from an estimated $5.82 a share, a jump of 28%.