Cabal about Cable..so stocks are undervalued LOL
thestreet.com
Cable Stocks Keep Plunging
By George Mannes
Senior Writer
06/10/2002 06:50 PM EDT
Adelphia Communications isn't your average cable company.
Unfortunately for cable operators, investors weren't making such fine distinctions Monday.
With Adelphia's new management publicizing allegations of inflated operating cash flow, revenue and subscriber counts, Wall Street played the guilt-by-association card Monday, whacking cable stocks down to new 52-week lows.
The victims ranged from the largest to the smallest of the publicly traded operators. Paul Allen-controlled Charter Communications (CHTR:Nasdaq - news - commentary - research - analysis) was the biggest loser for the day, falling nearly 10%, with AT&T Broadband-buyer wannabe Comcast (CMCSK:Nasdaq - news - commentary - research - analysis) next in line with a 4.5% decline.
Cablevision (CVC:NYSE - news - commentary - research - analysis), the Long Island-based operator, fell as much as 15% before making its way back to a 3% loss.
"This is a market about simplicity and risk," says Ryon Acey, analyst at BB&T Capital Markets. And with cable operators in general bearing massive debt loads, investors have increasingly done the simple thing: cut risk by selling.
Similarities?
There's no indication that other cable operators have engaged in the questionable practices that have brought down Adelphia. Those efforts appear to have focused on increasing earnings before interest, taxes, depreciation and amortization -- a common bottom-line measure which Wall Street has traditionally used as a valuation tool for cable companies.
But Adelphia's alleged practices -- which include inflating capital expenditures to diminish operating expenses and thus increase EBITDA -- are evidently giving Wall Street something new to worry about: whether all the operational statistics which cable operators feed to analysts each quarter do in fact correspond to reality.
Investors may also be dwelling on the resemblances, meaningful or not, that other cable operators bear to Adelphia. Long before Adelphia achieved its new infamy in March, the cable industry was well known for borrowing heavily to purchase new systems and upgrade old ones, and for operating under control of founders and their families.
Cable stocks have suffered mightily since the beginning of the year, with Comcast and Cox down more than 30% and the more highly leveraged Cablevision and Charter beaten down more than 70%.
But until the bad news stops streaming out of Adelphia -- and there seems little chance it will anytime soon -- investors seem loath to venture into the mess, wondering who else in the industry might by injured by Adelphia's woes.
How Low They Can Go
And in this atmosphere, anything that hints of financial complications is frightening to investors -- no matter how low cable stock prices have fallen and how attractive they might look to investors on a valuation basis.
J.P. Morgan cable analyst Jason Bazinet calculated that at the end of May the market was valuing cable subscribers at an average of $3,218 -- down $97 per sub from one month earlier and about $517 per sub lower than the average of the past three years.
In that context, Acey points people looking for cable investments to names such as Cox Communications (COX:NYSE - news - commentary - research - analysis), a proven operator with a clean balance sheet, and Mediacom Communications (MCCC:Nasdaq - news - commentary - research - analysis), a smaller, less expensive operator and somewhat riskier play.
One money manager who has shorted several cable stocks argues that investors are reacting logically to the likelihood that lenders will tighten up credit as far as cable operators are concerned as a result of the Adelphia mess. Less lending, says the short-seller, speaking on condition of anonymity, will mean lower prices for cable systems -- and thus lower values for cable stocks.
Presumably, that thesis will be tested if and when Adelphia sells the cable systems it has put on the block. But until a price for those systems is announced, investors will continue to worry.
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