Time to Buy Cable Stocks?


Is it time to buy cable stocks, which have been beaten down for so long? Business 2.0 and CNN/Money columnist and long time friend, Paul La Monica thinks so. In his latest column, he argues that the market is making too much of the DSL threat. Richard Greenfield, an analyst with Fulcrum Global Partners tells Paul that the three big Bells reported a 25 percent decline in net DSL subscriber additions from the first quarter to the second quarter. “Industry declines in broadband subscriptions are expected because of seasonal factors,” La Monica writes, “But Greenfield is predicting a smaller percentage decline — 15 percent — for Comcast, Cox and Time Warner (TWX), which, in addition to being the parent of CNN/Money, is the owner of the nation’s second largest cable firm.” As an insanity check, cable stocks are off 20 percent year to date, while Bells are down mere 5% on the year, despite making massive price cuts in order to gain market share in the Broadband business. Rob Sanderson, an analyst with American Technology Partners, expects annual cash flow gains in the high teens for the next few years. While he does not expect an instant rebound, Sanderson thinks that they are compelling long-term values.



I think the cash flow metric is misleading – you really need to look at free cash flow and take into account cap ex – which is still enormous for these companies. Especially ones that are still rolling out DVRs and the like. I’m doing this off the top of my head, but I believe Comcast, for instance, is going to do about $2B in free cash flow, and has an Enterprise Value of around $80B – so really about 2.5% (I may have some of these figures slightly wrong – feel free to correct!)

So, you’ve got a bunch of companies with large amounts of debt, high cap ex, balance sheet downside, flat subscriber growth, higher marketing costs, intense competition from satellite companies – seems like a lot of bad news. Add to that Comcast’s attempt at Disney which many people interpreted as showing that growth was a problem, and that while everyone is excited about VOIP, that is may or may not prove to be a big business with wireline generally losing lines every month. Oh, and VOD and other digital services have yet to be a big business as well. The market just hates that kind of uncertainy.

Even given all that, I think these companies may be good long term holdings – I just wouldn’t be getting in now.

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