Archive for category: Comcast

I enjoyed going on TV with my buddy Cody Willard. Unfortunately, since I debated Comcast with Cody and took the bull side, I’ll probably never get invited back!
Not much I can say at this point other than admit the bullish stance I took in July when the stock was $27 was wrong. Nevertheless, I still think that the penalty the stock is paying is far worse than the reality of the company’s fundamentals.
However, revenue and EBITDA growth are decelerating and, at least for 2007, free cash flow is down. Competition is rising, and cable bills are more sensitive to the economy than was previously thought. Against this backdrop, investor sentiment toward cable is not likely to improve. As a result, I don’t expect much of a recovery in the shares even though I see them as oversold.
What will it take to for the shares to make a meaningful comeback? The first step is decent guidance for 2008. Management needs to guide revenue growth to at least 9%-10% with margin expansion pushing EBITDA growth to 11%-12%. More importantly, capital spending must be no worse than flat with the new elevated 2007 level. The most devastating part of company’s new guidance is that they brought down the number of revenue generating units they will install (an RGU is a subscription to video, broadband or telephony) in 2007 while increasing capital spending. Comcast had assured us that as growth gradually slowed, capital spending would stabilize or fall, thus providing a big boost to free cash flow….

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With an AT&T acquisition of Echostar apparently imminent, I want to reiterate that while in the short-term investors will see the deal as negative for cable, in the long run the outcome may not be nearly as dire feared.
On its most recent conference call, Comcast specifically pointed to AT&T discounting using the satellite bundle (Dish or DirecTV + AT&T wireline + AT&T DSL) as a cause of lower than expected subscriber additions. In fact, Comcast said that the wireline TV offerings form AT&T (U-Verse) and Verizon (FiOS) had not had a material impact. If this is to be believed, then in the short-term an acquisition of Echostar by AT&T looks ominous for cable. AT&T has shown a willingness to discount aggressively and with Echostar in house will be able to more easily execute the strategy nationally. Cable stocks were down 2-3% yesterday and I suspect that this is the reasoning.
While I can’t argue with this near-term reaction, I think the long-term is a little trickier. By using Echostar as its primary multichannel TV offering, AT&T is foregoing massive cost synergies available to cable and Verizon which are able to offer the triple play across a single network. Maintenance, billing, and customer service will al be less efficient for AT&T than its peers. This should mean that AT&T’s discounting strategy has a limited life. The high cost producer can not maintain the lowest price for long.
An AT&T-Echostar tie-up will surely sour the mood of potential cable investors even further. But if it hastens the day when a stable oligopoly re-emerges it might not be as bad a thing as feared.

Following my post yesterday on Comcast, my buddy, hedge fund manager and soon to be anchor on the Fox Business Channel, Cody Willard, replied with a bearish view of the stock. Among Cody’s objections to my ongoing bullish stance on Comcast is, “$14 billion of market cap losses for wasting tens of billions of shareholder dollars building centrally-controlling systems is still just the beginning, IMHO. The point is that the company is in a secular declining industry since its entire model remains centered on controlling what and how and where and why people consume video.”
I am sorry Cody but I would hardly call it a waste of money to build a network that supplies cable TV to 24 million homes, broadband internet to 13 million homes, and telephone service to 3 million homes. These homes pay Comcast an average of $96 per month on which the company earns an EBITDA margin of 40%. Even with the high level of capital spending required to install new customers for each service and maintain the competitiveness of the network, Comcast is presently generating $2-3 billion of free cash flow….

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Cable stocks have been poor performers all year. Things started badly when Comcast raised it s capital spending forecast in conjunction with its 4Q06 earnings reported. The second hit came with 2Q07 results when basic and broadband subscriber growth disappointed pretty much across the board. Access line losses for AT&T and Verizon, basic subscriber losses for cable companies, and broadband subscriber growth for all players came in short of estimates. Now fears of a consumer spending slowdown are adding to worries about broadband growth.
I chalked the 2Q07 shortfalls up to a combination of the housing slowdown and a regulatory driven need for the cable companies to focus on getting digital set top boxes into subscribers’ homes which distracted customer service from retention and new service sales. I strongly suspect that 3Q and 4Q results will improve sentiment as subscriber growth, revenue, and EBITDA growth targets are hit. Nevertheless, investors have been worried that broadband growth is going to mature more quickly than previously expected with a new push coming from a consumer spending slowdown.
On this front, Jessica Reif of Merrill Lynch had some interesting insights in a report she issued on Comcast earlier this week. In the report, Jessica slightly lowered her broadband growth estimates for Comcast while strongly reiterating her recommendation of the shares. Her key conclusions on broadband was that penetration rates are following a similar curve to cable and satellite TV which means that ultimately 90% of households will purchase broadband. With penetration at just 50% today, there should be plenty of growth left. Jessica also noted that while 2Q subscriber counts fell short if looked at from an incremental penetration perspective, the results were on the low end of historical 2Q results.
Most interesting though was a look back at 1990-1992 cable subscriber additions and 2001-2002 wireless subscriber additions. Both periods saw penetration levels begin close to where broadband is today. Both periods saw a sharp slowdown or recession in consumer spending. So what happened to subscriber growth? It slowed significantly but it remained positive. In fact, you can make a pretty strong case that cable fundamentals were “defensive” in 1990-1992 as downside sensitivity to consumer spending was not as great as for other industries.
I think this is likely to repeat if consumer spending slows now. Broadband and especially cable telephony are still early in their growth cycles. Rising penetration should allow overall revenue and EBITDA growth to hold at good levels (10% or better) even if a consumer led recession occurs. Add in the likelihood that second half results should accelerate and the frustrating period of performance for cable stocks, and Comcast in particular will come to an end. Soon.

Big headline is something called City A.M. in the UK claims an inside source says that Comcast is considering a bid for Virgin Media. While Comcast may have requested info from the bankers running the auction I’ll be shocked if they bid. I think the Comcast-Virgin Media rumors are being planted by the Virgin Media side to boost the pressure on private equity to bid higher. Comcast has a great groove going and won’t mess it up by buying into the hyper-competitive, low growth UK market where cable is not leader as it is in the US. The same article mentions Time Warner as a potential bidder, another rumor I don’t believe. Weakness in Comcast or Time Warner on this news should be bought.