New York — There was a time when 42 million American homes were fed a smorgasbord of relatively inexpensive video goodies via fat white wires. But the ``cheap eats'' are over now. Cable television rates are rising. As of New Year's Day, state and local governments lost their cable rate setting powers. Under the Cable Communications Policy Act of 1984 cable operators can, for the first time, charge what the market will bear.
One survey shows 75 percent of the operators will hike rates for basic cable services an average of 18.5 percent in 1987. But lest cablephiles despair, there may be a means of covering those burgeoning cable connection costs.
Several brokerages have hit upon the nifty idea of investing in cable.
``The cable industry, in our view, offers the most attractive opportunity for investment in the media area,'' writes Goldman, Sachs analyst Barry A. Kaplan in a recent report. ``The stocks currently sell at unusually large discounts to their companies' private market value.''
Donaldson, Lufkin & Jenrette also came out with a strong buy recommendation last month on three cable companies - an about face from earlier in the year. A few months back, DLJ dropped all but 1 out of the 7 cable stocks it had on its buy list. With the group trading at a 40 percent discount, DLJ now says prospects for profits in '87 are ``unusually good.''
Salomon Brothers has jumped into cable by initiating coverage of American Television and Communications (ATC), a subsidiary of Time Inc. and the second largest cable firm in the United States. Analyst Lisa Donneson expects ATC, now selling at 10 percent below its August intial offering price, to outperform the market in '87.
Why the good reception for cable?
Construction outlays are largely over. Cash flow is improving. Deregulation means prices can rise faster than inflation.
There is some concern that if cable operators get too greedy customers will drop their hookups. But analysts say the hikes are not unreasonable and don't think customers will balk.
One reason: Operators plan to devote the extra cash flow to new programming. Industry leader Tele-Communications Inc. is leading an effort to form an exclusive cable network to offer original programming for basic service subscribers.
And with market penetration slowing at 57 percent of the households that can get cable, industry officials say new programming is a must if cable is going to lure fresh subscribers.
But if the outlook is so rosy, why are stock prices so low?
``No one's quite sure what's going to happen under the new tax law,'' says Dennis McAlpine, media analyst at Oppenheimer & Co. Most cable firms have been heavy users of the now-defunct investment tax credits and have generally been low taxpayers. And buyers of cable firms used to get favorable tax breaks.
Consequently, Mr. McAlpine has a rather lukewarm buy/hold sign on four cable companies.
``Wait awhile,'' he advises. ``For the stocks to move, there has to be some feeling that the private market value has held up under tax reform.''
McAlpine also cautions that if interest rates start ratcheting up, cable stocks will probably go down. Cable firms are heavily leveraged due to big startup costs and increasingly aggressive acquisition programs.
``Most of the major markets have been let,'' he says. ``The only way to grow now is through acquisitions.''
Acquisition candidates tend to have fewer than one million subscribers, he adds. Among the smaller firms, Comcast, Heritage Communications, and Jones Intercable are high on several brokers' lists.
But most analysts favor first the blue-chip cable firms (3 million plus subscribers): Tele-Communications, American Television & Communications. Tally taking
There's no doubt that getting a line on quality has been the investment key over the last 12 months. In 1986, the Dow Jones industrial average climbed 22.6 percent. (The Dow jumped 31.36 points on Friday, closing the week at 1927.31.) But investors shied away from the smaller stocks.
Standard & Poor's 500 index trailed the Dow industrials with a 14.6 percent rise. The NASDAQ composite soared 25 percent early on, but only managed a 7.4 percent gain. And the natural resource-laden American Stock Exchange posted a meager 7 percent gain.