Barron's Cover Story
Dec. 27, 2004
The Cable Company That Could
Wall Street is unimpressed by Comcast's prospects. Big mistake.
By ERIC J. SAVITZ
SO WHO PUSHED THE PAUSE BUTTON on Comcast's stock price?
These should be the golden days for the Philadelphia-based company, whose 21.5 million customers make it the nation's largest cable operator. As a multiyear, $38 billion makeover of its vast fiberoptic network heads toward completion, Comcast is finally rolling out long-promised services: Internet-based telephony, TiVo-like digital video recorders, high-definition local and cable channels, video on demand with thousands of hours of programming, and a revitalized, content-driven broadband Internet service. Says CEO Brian Roberts: "Watching cable is a completely different experience than it was even 12 months ago."
The numbers look sharp, too. Co-chief financial officer John Alchin told investors this month that Comcast is on course for at least two or three years of 20%-to-30% annual growth in free cash flow, as it scales back capital spending and ramps up its new services. Its older businesses are doing nicely, too. Comcast added a record 549,000 high-speed Internet accounts in the third quarter, and should sign up about 1.7 million for all of 2004, boosting the total to 7 million, more than any other broadband player. The company also added 341,000 digital video customers in the quarter; for the year, the total should hit a million.
Cable guy: CEO Roberts, foreground, has built a strong team and bet $38 billion that the public wants more "compelling" video and Internet-phone features.
Yet, Comcast shares, now in the low 30s, had dropped about 3% this year, through Thursday, a sharp contrast to the roughly 17% rise in Verizon, the largest Bell regional operating company (RBOC), which goes head-to-head with it in many markets.
This is a bit odd because, in the growing battle between the Bells and the cable outfits, the latter clearly have the upper hand. Comcast has completed its system upgrade, while Verizon, SBC and BellSouth, hemorrhaging local phone customers and giving off a whiff of desperation, have launched multiyear, multibillion-dollar projects to create new fiberoptic networks. Comcast and other members of its industry, meanwhile, seem poised to take a nice chunk of the residential phone market. The Bells, in contrast, are struggling to enter the video game, where they will be the fourth entrant, vying against cable and the two big satellite-television providers, EchoStar and DirecTV.
Then why has Comcast stock been slipping? Because the Street fears that the Bells will strike back, eating into Comcast's burgeoning free cash flow. Says Comcast's treasurer and co-chief financial officer, Larry Smith: "The concern is that there is going to be a price war -- that the RBOCs could do something that isn't necessarily rational."
Thanks to all that investor fretting, Comcast stock now looks cheap. Craig Moffett, an analyst at Bernstein Research, calculates that it trades at a 10-to-15 year low, on an enterprise value-to-Ebitda basis. (Enterprise value is a company's stock-market worth, plus debt, minus cash. Ebitda stands for earnings before interest, taxes, depreciation and amortization, a measure of cash flow.) Says Moffett: "Long-term expectations have turned extremely bearish for cable."
Too bearish, in fact.
...
Customers who use multiple services appear less likely to decamp to rival video or data providers. Cox Cable says that retention rates soar when customers sign up for a "triple play" -- voice, video and data services.
INTERVIEWED RECENTLY IN COMCAST'S MODEST Center City Philadelphia headquarters, COO Burke asserted that his VoIP service, to be called Comcast Digital Phone, eventually will command a 20% share in its markets. That's an extremely ambitious goal, but CEO Roberts argues that with VoIP "we can offer more features and a better value. The economics are compelling. And the features are compelling."
The cable giant will offer aggressive pricing, plus some novel functionality, such as customizable ring tones, available now only on wireless phones.
Comcast could even team up with wireless providers to offer cellular service, too -- a quadruple play. In part, the move would be defensive because the Bells have a strong position in cellular. Roberts imagines customers with dual-mode phones, operating on cellular frequencies on the road, then using WiFi and VoIP to make calls on the same number at home.
Analysts theorize that the company could link up with Sprint/Nextel or T-Mobile, either of which would be eager to gain access to its 21.5 million subscribers. Another trickier possibility would be for Comcast to work with Verizon or Cingular in markets where they don't compete directly for residential communications services. While Verizon certainly isn't likely to partner with Comcast in Philly, for instance, the two might team up in markets dominated by SBC or BellSouth
......
Noting that Cox Communications recently paid the equivalent of $3,800 to $3,900 a subscriber to take Cox Cable private, he concludes that the stock market is valuing Comcast in the low $3,000s per customer. The discount exists even though, as the cable industry's largest player, the company probably deserves a premium valuation. His analysis suggests that the stock could be worth about $40 -- more than 20% above its recent price. Now that's something worth watching. |
