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October 25, 2007

More Bad News On Comcast

Comcast reported disappointing 3Q07 results. More importantly, the tone of management comments about a number of issues was quite cautious and does not support their words supporting sustained double digit growth in revenue, EBITDA, and free cash flow. This quarter will further collapse the multiple and the shares are lower. Given the likely path of company's financial performance over the next three to five years the stock is way too cheap. However, management is not providing investors with the confidence necessary for them to pay for the growth. This situation will not be resolved in the short-term. I am re-evaluating the position. Essentially the decision is whether to show patience since upside of 30% exists in the shares. But we probably will be waiting several months at least for that to get started and Comcast is very widely owned so there could be more downside near-term as everyone throws in the towel.

Comcast reported cable segment revenue and EBITDA of $7.4 billion and $2.983 billion, respectively. These figures matched estimates as did margin expansion to 40.2%. Unfortunately, all the underlying metrics slightly missed targets. Comcast lost 65,000 basic subs vs. expectations of 30,000-40,000. Digital subs of 489,000 were about 15,000 light. High speed data adds of 450,000 were as much as 50,000 light. Of notable concern, telephony subs of 662,000 missed estimates of 700,000 to 725,000 and were down sequentially for the first time.

Management noted increased competition and marginal impacts from a slowing economy. They indicated they would respond by sharpening price points and introducing new product offerings beyond the focus on the triple play. Satellite and Telcos are using more aggressive pricing on one and two product offerings as well as tiering of high speed data. Comcast has not responded until now....

Guidance was maintained with a qualifier that competition and the economy "may have a slight impact." For free cash flow, guidance was changed from flat vs. 2006 to flat to down 10% vs. 2006. Investors are increasingly focused on free cash flow for cable companies and I believe this change is having a meaningful impact on the stock today.

The company announced a large new buyback program of $7 billion. That could buy about 10% of the stock at current prices. You would think this would be good news but cautious comments about the pace and funding of the buyback are adding to invest concerns. Management refuses to commit to an accelerated share buyback which signals a lack of confidence to investors.

Management stated that the 1.4 million addition RGUs would produce $600 million in new revenue next year. With revenue of $31 billion this year, obviously adding these subs is going to drive growth. I can’t see any scenarios where Comcast does not grow by at least 10% next year followed by a gradual deceleration toward mid single digit growth by 2011. Management is very firm is stating that it will have double digit growth for a few more years even with the increased competition.

If that is the case they need to more aggressive defend the stock and promote the good at the company. Instead they speak and act sheepish and cautious. Investors are taking this conflict as a lack of confidence in the long-term outlook. Until management does something to change the tone, the shares aren’t going to rebound. Producing decent numbers isn’t good enough. The street won't believe and won’t pay up.

Posted by Steve Birenberg at October 25, 2007 12:28 PM in Comcast