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Thursday, August 27, 2009

Who's afraid of Comcast's plans?

Asking why cable company stocks like Comcast trade at an "illogical" discount to phone companies like Verizon - despite the fact cable has higher growth and fatter profit margins and lower debt trends than wireless phones - Sanford Bernstein research analyst Craig Moffett blames the fear that Comcast ceo Brian Roberts will use the billions he's extracting from video, Internet and phone consumers to buy something big and unexpected.

"Ever since its aborted 2004 bid for Disney," investors worry Comcast "will use its free cash flow and substantial balance sheet capacity to acquire [Internet, programming, or wireless] assets, destroying value" by paying too much, or distracting management, or delaying profitability, Moffett told investors in a note yesterday.

"Comcast almost courts M&A skepticism" as it hoards cash while "waxing poetic" about spending millions for Web services like Daily Candy. "These fears translate into a significant (share price) discount" for Comcast, Moffett writes.

So unfair. "AT&T and Verizon, which trade at a premium to cable stocks, have similiarly long histories of destroying shareholder value" through mergers. Earlier this summer, Verizon chief executive Ivan Seidenberg told TV's Charlie Rose he wants to be "one of the biggest carriers of Internet traffic on the planet," and "serve any business customer in any major city on the planet," which to Moffett means Verizon shareholders "ought to be terrified" of which strange costly foreign company Seidenberg's going to buy next.

But, Moffett adds, at least the phone companies have "adult supervision," in the form of influential shareholders (some of them unionized employees and retirees) who demand big dividends. By contrast, investors worry Comcast, with its disproportionate Roberts-centric voting structure, has "no built-in mechanism for cash discipline." So "they'll probably just blow the money on something."

What does Moffett want the cable companies to do with all their cash? Give it to shareholders, of course. He predicts Time Warner Cable will start paying a dividend, while Comcast will re-institute big share buybacks. The company spent almost $10 billion buying back shares in 2005-08 before the market crashed.

Over at Gimme Credit, bond analyst Dave Novosel is less worried about Verizon. Sure, the company owes $65 billion, nearly twice its earnings (ebitda), partly because it "overpaid" for Alltel. And yes, it needs to spend another $6 billion building out FiOS video. But leverage will drop nearly one-third by the end of next year, Seidenberg has promised, as the company generates $7 billion in free cash flow a year and uses "virtually all" to pay down debt.
Posted by Joseph N. DiStefano @ 3:42 PM  Permalink | 9 comments
Comments   
  • 0 like this / 0 don't   •   Posted 5:40 PM, 08/27/2009
    If Comcast announces a big purchase, that's the sign that Comcast employees should update their resumes. 'Nuff said.
    — DC
  • 0 like this / 0 don't   •   Posted 5:48 PM, 08/27/2009
    Mr. D- How about analysis of FDIC almost broke and hedge funds taking over failed banks. Is our government really up to delivering on FDIC promises?
    — John Scanlon
  • 0 like this / 0 don't   •   Posted 6:32 PM, 08/27/2009
    Never mind the technicalities, Comcast is getting rich on my exorbitant cable and internet rates. Incidentlly, their internet service was down most of this morning. They will still bill me for a full days service.
    — rmw38
  • 0 like this / 0 don't   •   Posted 10:23 PM, 08/27/2009
    My cable service is fine. I love how Comcast is getting penalized for actually having a low debt ratio?? Moral of the story, continue to buy things you can't pay for, because some how its viewed more favorably then paying off your debt.
    — Capsulef
  • Comment removed.
  • 0 like this / 0 don't   •   Posted 8:59 AM, 08/28/2009
    John Scanlon, I'm not so worried about FDIC. Looks like another 100-200 mostly smallish banks will fail. The agency has several choices. One would be to unbend and allow more private investors to snap up banks - FDIC is resisting that, whether because they're worried PE and hedge funds would be bad owners, or because it looks bad politically. Which means there'll be more failures than there might have been - that's a policy choice. As you know banks (and their shareholders and customers) finance FDIC. As FDIC said this week it will probably need to pay out some billions more than their premiums in the next year. I agree with Bill Isaac ex FDIC head that it would be better to borrow that money from Treasury (not so much $ given current national debt levels) than to impose higher fees on banks just now - that would lead to even more contraction of lending. It would be very different if the biggest banks were failing at a major loss, but it doesn't look like that's gonna happen. I'm more worried what's gonna happen to Fannie and Freddie home debt.
    — Joe D
  • 0 like this / 0 don't   •   Posted 4:04 PM, 08/28/2009
    Now, Comcast should put it's signal on the sattelite
    — STEVE5444
  • Comment removed.
  • 0 like this / 0 don't   •   Posted 5:43 PM, 08/28/2009
    dont you guys get directtv and hughesnet?
    — maximus


9 comments
About Joseph N. DiStefano
Joseph N. DiStefano writes this blog to feed his PhillyDeals column in the Philadelphia Inquirer. Joe has been a member of Bloomberg LP’s New York Finance Team, wrote the book “Comcasted,” taught writing at St. Joseph’s University, and studied economics and history at Penn. Reach Joe at 215-854-5194 and JoeD@phillynews.com
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