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.