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December 06, 2007

I Was Wrong On Comcast

I enjoyed going on TV with my buddy Cody Willard. Unfortunately, since I debated Comcast with Cody and took the bull side, I'll probably never get invited back!

Not much I can say at this point other than admit the bullish stance I took in July when the stock was $27 was wrong. Nevertheless, I still think that the penalty the stock is paying is far worse than the reality of the company's fundamentals.

However, revenue and EBITDA growth are decelerating and, at least for 2007, free cash flow is down. Competition is rising, and cable bills are more sensitive to the economy than was previously thought. Against this backdrop, investor sentiment toward cable is not likely to improve. As a result, I don't expect much of a recovery in the shares even though I see them as oversold.

What will it take to for the shares to make a meaningful comeback? The first step is decent guidance for 2008. Management needs to guide revenue growth to at least 9%-10% with margin expansion pushing EBITDA growth to 11%-12%. More importantly, capital spending must be no worse than flat with the new elevated 2007 level. The most devastating part of company's new guidance is that they brought down the number of revenue generating units they will install (an RGU is a subscription to video, broadband or telephony) in 2007 while increasing capital spending. Comcast had assured us that as growth gradually slowed, capital spending would stabilize or fall, thus providing a big boost to free cash flow....

....Look, Comcast is still going to grow revenue 11% this year. EBITDA will grow 13%. The company will add 6 million RGUs, up from 5 million a year ago. Those fundamentals are only slightly worse than originally expected and worth a much higher stock price. The problem is that capital spending this year will be just 80% of the 2006 level. So you got growth but no payoff. Not good enough with competition and economic sensitivity on the rise.

Therefore, I don't think decent guidance will be good enough to really get the stock moving. Investors won't trust the guidance, particularly on capital spending and free cash flow, after having been burned badly in 2007 by a couple of capex budget increases and decelerating revenue and EBITDA growth as the year moved along. As a result, it will probably take decent guidance and an in-line 1Q08 report to begin to rebuild confidence. Comcast won't report 1Q08 until the end of April, so we are probably looking at five months more in the doghouse at a minimum.

I will probably be selling client positions in Comcast before year end. Taxable accounts can use the loss and I can always buy the stock back if the gloom lifts. I plan to give it a few more days though to see if the stock can bounce closer to $20.

Posted by Steve Birenberg at December 6, 2007 12:35 PM in Comcast