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August 09, 2007
Cablevision Results Cause Comcast Pain
Comcast (CMCSA/CMCSK) took a serious dive yesterday, trailing the market action all day including a 3% drop when the DJIA was up close to 200 points, before recovering in the last half hour to close down 1%. I am certain that the poor quarter and reduced guidance from Cablevision (CVC) was at fault.
CVC missed expectations in its Telecom division pretty much across the board. The worst results were the 4% gain in EBITDA against expectations for a 13% gain and worse than expected subscriber additions in all four components: basic cable, digital cable, high speed internet, and telephony. The poor results from CVC cap a lousy quarter across the cable industry and a similarly poor quarter for AT&T (T) and Verizon (VZ) in terms of high speed data additions.
Cable bulls like me have little to fall back on in the short-term other than hope that the second half strength forecast by Comcast and Time Warner Cable (TWC) comes to fruition. If it does, there probably won’t have been a better time to buy cable since a similar nadir almost two years ago exactly. At that time, investors were convinced that the competitive battle between cable and telco was going to drive pricing for all services lower and crush margins right as capital spending would escalate to meet the worsening competitive landscape.
The bearishness in 2005 turned out to be way off base as cable financial and subscriber results accelerated throughout 2006 and cable stocks soared – Comcast was up over 70%. Now the bear case has been reinvigorated because estimates look too high in the face of slower subscriber growth.
CVC's results suggest a slightly different call for the bears. ...
Since this marked the second consecutive quarter where CVC's capital intensity fell along with slower subscriber growth, the fears of collapsing free cash flow seem less warranted. The risk now appears to be that EBITDA growth will be slower as less subscribers sign up for new services and as marketing spending rises to meet greater competition from telcos for TV subscriptions.
I suspect what is going on has as much to do with the housing downturn as it does with growing competition. Fewer houses being built and more vacancies means fewer addresses are signing up. If pricing holds, as it has done easily so far, then investors could quickly turn back to cable even if the top end of expectations for 10-14% revenue and EBITDA growth is not achieved.
That is what I am betting on and I look to accelerating financial and subscriber growth in the second half from Comcast as the catalyst.
Posted by Steve Birenberg at August 9, 2007 10:37 AM in Comcast
1.do you think this credit crunch will be contained or will go on to a full blown crisis/depression?
with that in mind,would you hold or sell at this time good companies that are high beta stocks [e.g.micc and cetv]?
2.what place do you think cash and/or gold will play in dealing with the crunch?
3.do you think there is still any chance for the vmed deal to be completed?
1. I still think this primarily a Wall Street crisis although it could easily spillover and lead to a recession. I think the downside in stocks will be contained to 15-20% off the July highs at most so that would put us about halfway through in the orst case scenario. Clearly high beta stocks will suffer if te drop another 8-12% but I plan to hold them if I like the long-term story.
2. Cash always has a place in a diversified asset allocation. I do not follow or have an opinion of gold. I'd be holding above average cash and would not feel in rush to try to time the bottom.
3. Eventually VMED will be sold because they will never get a decent public valuation due to slow growth and competition. It won;t be sold for months now, however. The second quarter was better than I feared so it should hold in the 22-24 range all esle equal.
