Cable stocks are too cheap.

At least, Credit Suisse cable analyst Bryan Kraft thinks so. Kraft today upgraded his rating on the cable sector to Market weight from Underweight, “based on our bullish view toward cable fundamentals, cable’s solid long-term strategic position, attractive valuations on 2008 estimates and our view that cable industry consolidation will continue.” He says that based on his 2008 estimates, “current valuations are unsustainably low,” with the stocks trading in EV/EBITDA multiples comparable to the much slower growing RBOCs.

Kraft today upgraded shares of both Mediacom (MCCC) and Charter (CHTR) to Outpeform; he has price targets of $14 on Mediacom and $6 on Charter. He also raised his price targets on both Cablevision (CVC) and Time Warner Cable (TWC), to $36 and $43, respectively; he is Neutral on both. He maintains an Outperform rating on Comcast (CMCSA), with $32 target price.

Kraft notes that the Street has been concerned that the industry could see cap ex ratchet up next year; but he thinks the fear is misplaced, and that cap ex next year should be in a range of down 5% to up 5%.

On the consolidation front, Kraft thinks Charter could eventually be a seller. “We could envision parts of Charter being sold to Time Warner Cable and other parts to other cable operators, including rural operators,” he writes. Meanwhile, he thinks Mediacom “could combine with one of the private-equity based rural operators such as Suddenlink or Bresnan, “and could be used as a vehicle for taking those entities public.”

Kraft says he prefers Mediacom over Charter, since Mediacom trades at a discount to the sector valuation, while Charter trades at a premium. But Charter could provide more bang for the buck: he says Charter’s stock will move in either direction 5x as much as Comcast’s in response to a change in enterprise value.

A couple of other notes from Kraft on consolidation. He says Comcast is not likely to buy Sprint (S) in the next two years; he says it is “the last thing Comcast management really wants to do.”

He also thinks that more consolidation is needed in cable. He says Time Warner is interested in buying Cox, Brighthouse, Insight and Cablevision, as well as some of Charter’s systems. He says Comcast is is likely to acquire systems on a smaller scale to improve clustering opportunistically. He says Suddenlink and Mediacom “will likely ne key players in rural cable consolidation.”

Finally, Kraft also says concerns about cable being disintermediated by the Internet are overblown. Here are his top three reasons not to worry about the issue:

  • The Internet does not have the capacity to carry the massive amounts of traffic that would be required to support a Web-based multichannel video service to a large user base, and no service provider has the incentive to invest in the capacity since it would be to the detriment of their pay TV business.
  • There is no rational economic incentive for entertainment companies to promote the Web as a distribution channel that cannibalizes pay TV. Using the Web as an incremental revenue opportunity in rational, but taking subscribers away from multichannel TV is not.
  • Quality: the public Internet has no quality of service; therefore, latency could be a major problem associated with Internet-based content distribution…most video today is transmitted over the Internet at less than standard definition resolution.

Meanwhile, Pali Research analyst Richard Greenfield today repeated his Buy rating on Charter, and raised his price target on the stock to $5.25 from $4.50. He says most investors still think of Charter as a company with too much debt and bad subscriber demographics. “Therein lies the opportunity in CHTR shares,” he writes. “While the stock has significantly outperformed its peers over the past 18 months, most investors are still not focused on the CHTR story. Yet we believe the groundwork laid by a new management team is just beginning to bear fruit, with growth set to accelerate notably over the coming 12-24 months.”

Today:

  • Mediacom is up 62 cents at $10.10.
  • Charter is up 2 cents at $3.93.
  • Comcast is down 34 cents at $27.01.
  • Time Warner Cable is down 40 cents at $38.28.
  • Cablevision is down 10 cents at $36.25.