Kagan's Column: In These Fearsome Times, Focus on Sales
By Paul Kagan
This is one of those summers when the heat freezes people: heated dissent against a difficult war, boiling oil prices at historic peaks, blistering accusations in a presidential campaign, the radiation from rising interest rates and possible inflation. You can hardly blame investors for losing their cool.
To a degree, media and telecom have been pushed out of the headlines, their stocks driven back toward prior lows, by issues of state and globe. While Orwellian distant wars and terrorist threats have not slowed business, they have blocked the view of long-range values.
So is this why cable stocks, in this summer of our discontent, languish at cyclical lows of valuation? Did MSO stocks drop because a low-taxing president may lose to a deficit-reducing one in November? Has cable simply been plagued, along with other stocks, by war, oil and inflation? Or, as The New York Times asked July 28, are the telcos "stealing momentum from the cable industry in the fight for broadband customers?" My bet: at least all of the above.
The average MSO, at the height of the industry's stock popularity (1/21/00), traded publicly at 17.5x year-ahead cash flow. At the depths of despair (10/9/02) the multiple had fallen to 8.7x. Despite surging cash flow and recovering stock prices since then, the multiple dropped to 8.5x (7/28/04).
In the past, cable stocks always led the rebounds from bear-market lows, but this time, MSOs were up (at end-July) only 67% from Oct. '02 versus +76% for the tech-oriented Nasdaq 100. Even though margins and cash flow--due to new services and improved bundling--are on the upswing, basic subs are not, and the rate of growth of high-speed data has slowed. Satellite and telco competition clearly has dented the cable industry's value image.
Typically, MSOs dug themselves out of ditches like this by paying up for their next acquisition. By paying more than the public was willing to pay for subs, operators shamed investors out of their lethargy. Thus it shouldn't have come as a surprise Aug. 2 when Cox broke up the cable value logjam. The Cox family did something it did twice before: make a bid to take itself private, this time at a 16% premium over its prior trading price of $27.58. Wall Street bolted awake and drove Cox shares as high as $2 above the $32 bid price. Like old times. FYI: Cox's bid equates to 9.6x '05 estimated cash flow and $4,270 per sub, with no value accorded to a 25% interest in Discovery Channel. Kagan Research estimates its private market value at 11x and $4,900. With the Discovery asset added in, Cox's PMV per share would be $43.
The move once again revealed the perennial difference between a cable company's "private" and "public" value. With a few exceptions, like the market top in January 2000, public traders and investors deal in opportunities to buy stock (in many industries, not just cable) at an artificial discount from its true worth. And once again, the anguish of a crash, further shaken by witch hunts and blame, pushed enough people out of the market to give Cox yet another reason to take itself out of the game.
Four factors contribute to market malaise: the economy (consumer spending, unemployment, interest rates, inflation and taxes), geopolitics (war, oil), domestic politics (who occupies the White House?) and competition (primarily satellite/telco). The first three are interrelated. Consumer confidence, jobs, the cost of money, the cost of living, the cost of ordinary and capital gains and how the war plays out all depend on who lives at 1600 Pennsylvania Ave. When all those stars are not aligned, everybody lags. When they're all in gear, stock prices in all fields take off.
Lack of demand for digital and broadband is not the issue. The primary value-inhibiting factor is the threat of other media platforms. Since old issues of financial weakness were long ago put to rest, MSO stock prices that lag the rest of the market are indicators of fear of competition.
The best way cable can offset such concerns, besides selling out (or buying back), is to sell more subscriptions and/or more services to basic subscribers. Cable high-speed penetration of basic subscribers is nearly triple that of the telcos (23% versus 8%). But every new DSL sub gives satellite providers an extra opportunity to counter cable's modem edge. Once DSL is in a home, the rest of the debate is just a video decision between cable and DBS, and maybe, one day, telcos. But while this may bother Wall Street, Cox is betting $10 billion that it won't be a problem. |
