<<Hey Victor, yes I am, but it will be lead by the cable companies, not by upstarts like Yahoo! >>
You should do some homework re the abysmal financials of these cable co's you think are going to pull CSCO out of the doldrums. Adelphia just went belly up.
Feature Story, Friday, June 28, 2002
Cable TV Stocks Go In For Pummeling On Debt, Cash Flow, Accounting Fears
BY REINHARDT KRAUSE INVESTOR'S BUSINESS DAILY
Wall Street pounded cable TV and media stocks Thursday in the wake of accounting scandals that put the spotlight on debt-laden companies.
Investors fled firms that are valued on earnings before interest, taxes, depreciation and amortization, or EBITDA. That cash-flow gauge often is used to evaluate high-debt firms that don't report positive earnings per share.
Capital-intensive industries such as cable TV favor EBITDA as a yardstick. And the companies generally tell shareholders they need to spend money to make money. EBITDA excludes costs associated with capital spending.
But accounting scandals involving WorldCom (WCOM), Adelphia, Enron and others are shaking investor faith in high-debt firms, especially those with growing competition.
There's concern that some companies may manipulate their books to hide costs or inflate cash flow — as WorldCom did.
"It's basically any company that's valued on an EBITDA-type basis," said Ray Schleinkofer, industry analyst at UBS Warburg. "Investors are taking a harder look. People are reassessing the risk premium of owning these stocks."
Big Spending
The cable TV industry has spent more than $45 billion to convert old analog cable systems to digital broadband technology. They've been rolling out new services — digital TV, Internet access, video on demand and telephony — over the new networks.
But cable faces growing competition from satellite TV broadcasters and phone companies.
"With cable the promise has been they're going to spend money on these networks, and once they're done you've got this EBITDA, which is basically an annuity of cash flow going forward," said Schleinkofer.
Phone companies like WorldCom, though, didn't deliver on promises that the Internet boom would fuel double-digit growth.
And cable firms are struggling to find customers who'll write bigger monthly checks for entertainment or communications.
Hitting A Wall?
Cable TV firms have signed up more than 16 million U.S. households for pricey digital services that offer more channels and pay per view.
That's just 20% of cable homes, and they may hit a wall at 30%.
Yankee Group projects cable TV firms will add 5.5 million digital subscribers in 2002 vs. 6.5 million last year.
To boost revenue, some cable firms say, they'll offer premium movie channels on only digital channels. That would cost consumers an extra $10-$15 a month.
And some cable TV firms want to raise fees for their broadband Internet service.
In mid-June, Moody's Investor's Service issued a report on cable TV firms that carry high-yield debt. They have to pay high interest on bonds to raise money.
The report covers Insight Communications (ICCI), Cablevision Systems (CVC), Charter Communications (CHTR) and Mediacom (MCCC) — all stocks hit hard Thursday.
"We remain concerned about the almost universal balance sheet weakness and lack of flexibility among high-yield operators," it said.
By 2010, cable firms' share of the pay TV market may shrink to about 50% from a still-impressive 80% today, Moody's says.
Programming costs are among Cable TV firms' biggest expenses. Those costs are rising as cable systems add more channels, especially sports programming.
"EBITDA margins have been trending down in most cases, driven in large part by rapidly escalating programming expenses and new product rollouts," the Moody's report said.
In fact, almost all cable TV firms have yet to hit another financial yardstick they've been touting for years. That's free cash flow — money not needed for operations or reinvestment.
Even so, there's hope for cable TV firms. Regulators allow them to raise rates regularly.
In addition, many analysts say the cable wiring going into homes is superior to phone lines or satellite links, letting cable TV firms offer a bundle of video, Internet and phone services.
Local phone companies lack a video product. Satellite TV broadcasters lack fast Internet access.
Customers that buy a mix of cable products are less likely to cancel service, the companies say.
Some cable TV firms seem in better shape, analysts say.
They cite strong balance sheets at Comcast Corp. (CMCSK) and Cox Communications (COX).
They've piled up less debt relative to the cash flow their systems generate, analysts say. However, some analysts fret over Comcast's planned buy of AT&T Broadband. (T)
The deal would lift Comcast's debt, now $12 billion, significantly. Comcast, though, plans to sell off some assets to pay down debt.
"If the rating on Comcast is lowered, we do not expect the rating to fall below investment grade based on our current assessment of industry fundamentals," Standard & Poor's Inc. said on June 21.
© 2002 Investor's Business Daily, Inc. All rights reserved. Investor's Business Daily is a registered trademark of Investor's Business Daily, Inc.
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