Another Good Quarter and Maybe Regulatory Clarity for Comcast

In a tough year for media and entertainment stocks, Comcast (CMCSK) has been a good performer rising 11% through October, a bit ahead of the S&P 500. As the just reported third quarter revealed, performance would be even better if not for the headwinds that have buffeted media and entertainment stocks. The good news is that the headwinds for the group and specific to Comcast are likely to diminish in the months ahead. Comcast remains one of the most attractive large cap stocks Northlake follows with upside of 20-30% looking out one year.

In the quarter ending September 30, 2014, Comcast reported results right inline or a bit better than analyst estimates. Overall, revenues grew 4%, operating cash flow rose 7%, free cash flow rose 27%, and EPS gained 12%. This is the math that works for Comcast shareholders as the free cash flow is used to sustain the company’s dominant competitive position through (1) investment in the business or acquisitions, (2) payment of a healthy dividend, and (3) aggressively repurchasing shares. The math gets even better after Comcast’s acquisition of Time Warner Cable closes next spring.

The acquisition of Time Warner Cable is one of headwinds Comcast and the media and entertainment stocks are facing this year. The regulatory review of the merger is closely related to net neutrality debate, which in turn is tied to the fears about the competitive threat and business model interruption surrounding emerging over-the-top (OTT) video services. Over the past few weeks, investors began to fear that the government might block the merger as part of increased regulatory oversight of the media and entertainment industries. This was evident as the spread on the between the value of the merger and Time Warner Cable’s stock price rose form 5% to 10%. However, late last week the spread narrowed back to under 8% after the FCC floated a trial balloon

I believe that the trial balloon floated last week by the FCC is the first concrete step toward resolving these issues in a way that should not greatly impact Comcast’s long-term growth and releases the upside related to the acquisition of Time Warner Cable. It appears the FCC is looking at a compromise solution on net neutrality where the interconnection between Comcast and other internet service providers (ISPs) and large websites or web services would be under FCC jurisdiction but the relationship between ISPs and their subscribers (that would be you and me) would remain unregulated.

This compromise is important to Comcast because it also signals that approval of the merger with Time Warner Cable is likely. The FCC can use the new net neutrality rules and apply other constraints when it approves the Comcast-Time Warner Cable merger including prohibiting the new larger company from charging websites and service providers for interconnection. Applying conditions to Comcast post-merger also is a good signal to the rest of the industry as to what the FCC is looking to accomplish as it applies regulation in the future. More regulation is never welcome o Wall Street but this compromise probably works for all players and will ease investor and uncertainty. Comcast can thrive under this regulatory framework, which is why I think another quarter of solid earnings can allow the shares to continue to outperform.

CMCSK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. CMCSK is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Comcast Remains a Very Best Idea

Comcast (CMCSK) reported better than expected 1Q14 earnings. The upside came from NBC Universal, a good thing given the magnitude of the financial upside in a successful turnaround,. However, Comcast financial performance and stock sentiment is driven more by the much larger cable business. On that side of the company, results were very slightly disappointing but nothing to worry about given seasonal factors, the timing of price increases, and possibly management’s desire to keep results in check with government scrutiny high ahead of the regulatory review of the proposed takeover of Time Warner Cable.

Make no mistake. Comcast is powerful company with an excellent financial profile. Overall revenue grew 13.7% with operating cash flow up 10%. These figures were juiced by the big ad revenue from NBC’s telecast of the Winter Olympics and huge upside at the Universal movie studio (movie profits are had for analysts to model). The core cable business saw revenue and operating cash flow grow by 5.3% and 4.3%, respectively. Both figures were about 50 basis points below expectations driven primarily by Comcast putting in place lower and later price increases than expected. Video subscribers grew for a second consecutive quarter showing the power of the company’s scale and the success of its industry best X1 operating system. High speed data and voice subscriber additions were both below expectations, a possible concern given that broadband is the growth driver of the consumer cable business. Management expressed no concern, however, and attributed any disappointment to the normal course of business.

After falling about 8% from its pre-Time Warner Cable merger announcement all-time highs, CMCSK shares have acted well since the report, rising about 3%. Beyond the generally solid reported numbers, investors were cheered by comments surrounding materially larger share buybacks using proceeds from any divested cable systems. The company expects to sell 3-4 million of the 11 million Time Warner Cable subs it is trying to acquire. Recent news reports suggest the sale process is going well. Investors may also be responding management comments indicating very high confidence in deal synergies and upside form the proposed merger.

Comcast remains one of my very favorite stocks looking out over the next twelve months. Regulatory overhang surrounding the merger approval process may present a headwind but I see upside of 20-30% with the higher end assuming approval of the Time Warner Cable merger with strict conditions. Presently, Comcast trades at about 7.2 times 2014 EBITDA and 12 times free cash flow. I think this is a bargain in a growth starved world for large cap companies. My target assumes slight multiple expansion and does not consider full upside of what is looking like a very real turnaround at NBC. Share buybacks and a 1.8% dividend yield provide support as does the very stable financial model.

CMCSK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. CMCSK is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Comcast Continues to Shine

Comcast (CMCSK) reported another excellent quarter and indicated the outlook for 2014, and even 2015, is strong. Showing confidence in its business strategy, execution, and growth potential, the company increased the dividend by 15% and expanded its share buyback program by $3 billion. The headline financial metrics for the fourth quarter were impressive: revenue +5.8%, operating cash flow +8.3%, free cash flow +6.9%, and EPS +28.0%.

Importantly, both sides of Comcast, cable and content contributed to the good results. In fact, the NBC Universal business (TV networks, theme parks, film and TV studios) grew faster than cable this quarter and the turnaround the street has been expecting appears to be ahead of schedule. In hindsight the two-step takeover on NBCU was well-timed and completed at a very attractive price with a superb financing strategy. Cable alone drives Northlake’s target of mid-$60s for CMCSK shares. Moving NCU’s implied valuation closer to peer content companies like 21st Century Fox and Disney could add a few more dollars to CMCSK upside.

On the cable side, CMCSK is using its scale to improve customer service, provide advanced programming navigation and choices, rapidly grow business services, and dominate the broadband business. Despite lots of worries about the future of cable TV, CMCSK seems to have built a defensive moat around the business leading to modest growth. With broadband and business services growing much faster, the overall cable business can sustain mid-to-upper single digit growth.

CMCSK also is somewhat hedged against the changes impacting the TV business by owning both distribution and content. In particular, the broadband business will benefit from any services designed to shift TV viewing to “over the top” or internet-based. In addition, OTT business models seem to offer incremental upside to NBCU as demand for quality content from new distributors would increase.

Overall, CMCSK seems like an ideal megacap company for the current economic and market environment. Consistent moderate growth in revenue and stable margins and capital spending is driving above average free cash flow growth which CMCSK is using to reward shareholders with rising dividends and share buybacks. The balance sheet remains very strong with capacity to further increase shareholder returns through consolidation opportunities in cable or content. Should those opportunities fail to materialize, substantial additional share buybacks and dividends are likely. Using a historically conservative 8X multiple for cable and an industry average 10X multiple NBCU, Comcast can trade to the mid-$60s, supported by significant share buybacks and a dividend yield approaching 2%.

CMCSK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. CMCSK is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Comcast Continues Excellent Performance

Comcast (CMCSK) reported mixed results relative to consensus expectations but growth remains vibrant and the outlook is excellent. Financial results were good with mid-single digit revenue growth and modest margin expansion leading to high single digit growth in operating cash flow. There was modest disappointment with subscriber counts at cable but nothing outside the margin of error. NBC Universal continues to show a strong turnaround with a significant potential if the improved ratings at the NBC network hold through spring.

Comcast’s financial profile is superb and offers promise for significant boost to shareholder returns in early 2014. The company is ahead of schedule in reaching its targeted debt levels. This should mean a big boost to the share repurchase plan and dividend is coming early next year. There is also the possibility that Comcast increases its debt level modestly to further juice return of capital to shareholders. Management seems 100% committed to its debt targets but by any measure there is room for more debt given the stability of the financial model.

Management may be waiting on rumored industry consolidation in cable as the company has some capacity to add subscribers without violating government ownership limits. Scale truly matters in cable as Comcast has shown by outperforming the industry significantly over the past year. Industry pioneer John Malone is leading the charge for more industry consolidation, something that can benefit Comcast in two ways. First, it reveals the value in the cable business, which Comcast’s trading multiples arguably do not reflect. Second, participating in consolidation could allow Comcast to gain even more economies of scale and further improve the financial model.

A slight expansion in the multiple applied to Comcast’s cable business along with an industry average valuation for NBC Universal would lead to Comcast shares approaching $60. With business trends stable and financial strength unparalleled in the media industry, Comcast shares are worth owning.

CMCSK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. CMCSK is a new long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

Comcast Attractive While The Rest of Cable Engulfed in Merger Rumors

Despite merger and acquisition rumors popping up all around the cable and satellite industry, Comcast CMCSK) shares have not moved higher. This makes sense since Comcast is by far the biggest company in U.S. pay TV industry with 25 million subscribers. Charter Communications, now 25% owned by cable industry pioneer John Malone’s Liberty Media (LMCA) has just 4 million subscribers. Charter is hoping to buy Time Warner Cable, the second largest cable company, with 10 million subscribers. The combination of Malone’s return and his bullish outlook for cable broadband and the possibility of acquisitions at premium prices suggest the value of a cable subscriber has moved up considerably. While Comcast will not be sold and is unlikely to buy other cable systems, all the activity in the industry does give a boost to the value of its subscribers and, in turn, its stock price. Add in early signs of turnaround at Comcast-owned NBC, steady growth in NBC Universal cable networks and theme parks, continued mid-single digit growth in Comcast’s core cable TV and broadband business and Comcast shares look like they have at least 20% upside.

Comcast generates about 80% of its operating cash flow from cable and 20% from NBC Universal. Other pure play cable stocks are trading at 8-9 times EBITDA in the current rumor-friendly environment. Assets similar to NBC Universal’s stable of cable TV networks and theme parks trade at more than 10 times EBITDA. However, at $38, Comcast shares trade at less than 6.5 times EBITDA. Again, Comcast assets should not be valued at acquisition inflated premiums but somewhat higher valuations seem warranted. At a blended multiple of 8 times 2014 EBITDA, Comcast would trade at $60, a full 50% above the price Northlake clients bought in June. At 7 times EBITDA, Comcast would trade just over $50, still 30% above Northlake’s recent purchase.

One final support for higher prices for Comcast shares is the company’s excellent balance sheet and free cash flow. Comcast is projected to end 2013 with debt at just a little over 2 times EBITDA. This is a very healthy balance sheet indicative of investment grade ratings. Free cash flow should be comfortably over $3 per share in 2013, giving the shares a free cash flow yield of over 8%. Comcast is using its free cash flow to aggressive buy its own shares and pay a healthy dividend. Shares outstanding are falling by over 2% per year providing further support for forward valuation of Comcast shares. Modest dividend increases can also be expected each year on top of the present current yield of almost 2%.

CMCSK is widely owned by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Regulatory filings can be found at www.sec.gov. CMCSK is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focusing on media, entertainment, leisure, communications, and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the Entermedia Funds.

Cablevision: Mixed Fundamentals Offset by Potential Asset Spin-Off

Cablevision (CVC) shares jumped sharply following the release of 1Q09 earnings. The upside is being driven by free cash flow and the announcement that CVC will consider spinning off its Madison Square Garden assets. I found the fundamental operating trends at the cable business to be slightly disappointing with revenue and EBITDA at the very low end of expectations and subscriber growth below consensus.

MSG assets include the arena, the MSG and Fuse TV networks, the Knicks, Rangers and WNBA Liberty, Radio City Music Hall, and the Beacon and Chicago Theaters. Plans are underway to build a new arena or dramatically upgrade the current arena at a very high cost.

It is understandable why investors would bid up CVC on the basis of FCF and an MSG spin. The company remains highly leveraged even though near-term refinancing risk has been dramatically reduced. Most importantly, the Dolan family has a poor history of acquisitions and capital allocation so eliminating one of the major capital consumers in MSG suggests that the core cable business is going to get all the attention it deserves and the shareholders will benefit from what looks to a peak in capital spending and the long awaited free cash flow promise offered by the cable business model.

CVC reported 11% revenue growth and 14% EBITDA growth in 1Q. Both figures exceeded expectations. However, the upside came from MSG, the commercial telecom business, and the cable networks. Cable only revenue and EBITDA growth was 5% and 7%, respectively. These numbers are in line or slightly trail Comcast and Time Warner Cable in 1Q09. CVC usually outperforms. CVC's lack of exposure to new subs that are losing their over the air broadcast signals may be a factor.

At the subscriber level, CVC lost 6,300 basic subs, below expectations for a lsight gain. Digital TV subs fell well short of expectations at just 9,800 vs. consensus of 25,000. High speed internet subs cam ein at the low end of expectations while telephone was in line. Compared to expectations this is the weakest subscriber performance for CVC is some time. It could be an indication that the NYC economy is finally decelerating, that Verizon's FiOS is having a greater competitive impact, or that CVC's incredibly high penetration ratios have finally created a ceiling.

Despite my disappointment on the fundamental trends this quarter, I can not emphasize enough that the MSG spin is a major positive. It represents a significant change in approach by the Dolan family and could serve to dramatically reduce or eliminate the "Dolan discount" long present in the shares. That said, it is no sure thing the spin goes through given past missteps of this sort at CVC and market conditions. As a result, if you were fortunate enough to be long CVC recently I would take a little off the table on today's strength.

Comcast Beats Across the Board to My Surprise

Comcast reported better than expected 1Q09 results pretty much across the board. I completely missed this as I had expected this to be the final quarter of sluggish growth with estimates coming down again. I underestimated Comcast's excellent operating management and favorable seasonal trends.

It was clear after Time Warner Cable (TWC) reported yesterday that big cable companies had a good quarter. Competition with telcos is fierce but rational and each side still is able to find growth drivers without severely damaging industry economics.

Comcast reported 5% revenue growth and 8% EBITDA growth, above my expectation for mid-single digit growth. Full year estimates may rise slightly though management did provide a note of caution with a statement that trends in March and April weakened vs. January and February.

Subscriber metrics were better than expected. Basic sub losses were modest, especially given big TV gains for the telcos in 1Q. High speed internet was much better than expected. Only telephony fell short although revenue growth for voice was over 30%.

Profitability is getting a boost as internet and voice economies of scale kick in across a a largely sunk network costs. Margins exceeded expectations, rising 120 basis points to a very healthy 40.9%.

The best news is continued growth in free cash flow driven by falling capital spending. Free cash flow grew 95% to $1.37 billion as overall spending dropped $200 million. As a percent of revenue, capital spending was just 13.1%, down form 17.1% in 2008 and 19.6% in 2007. Comcast plans to sue 2009 free cash flow to pay down debt given the unusual economic and credit market environment. However, the company is already below leverage target so assuming the economy is stable later this year a very large share repurchase is looming.

2Q faces seasonal headwinds along with the concern regarding slowing trends in March and April. This could limit further upside in Comcast shares following the strong run yesterday and this morning. However, with a big mea culpa from my blown preview of 1Q09, if Comcast can navigate the current environment and sustain mid single digit growth, the long-term value is the shares is higher. The key is maintaining free cash flow near 1Q levels.

I am not a buyer after the run but Comcast is back on my radar screen as a buy on weakness.

Catching Up With Comcast

Comcast COO Stephen Burke spoke recently at an industry conference and had some interesting insights. I would have missed it if not for my subscription to SNL Kagan.

Burke spoke optimistically of the possibility of picking up millions of basic cable subscribers in 2009 due to the transition to digital TV. Kagan calculates that as many as 6 million TV households within Comcast's territory presently receive only over the air signals. Most analysts, including Kagan, are assuming some of these households will subscriber to cable TV once their TVs stop working. I've seen estimates of up to 10% of the blacked out households taking cable and there is positive subscriber additions for the digital TV transition built into 2009 estimates. Burke, however, is more optimistic, believing up to half of the blacked out households will switch to cable. On its own this would be a meaningful positive surprise. Adding in the possibility that these households would now be more receptive to broadband and telephony services offered by Comcast and it could be a big deal.

Offsetting this positive is Burke's view that housing will present a headwind for subscriber growth all the way through 2009....

The problem is lack of new household formation – there just aren't any new subscribers to sign up, you have to steal them all from your competitors. I believe that Burke's view is a little more pessimistic than what is currently assumed in 2009 cable industry estimates. However, upside may exist from the fact that Comcast appears to be budgeting for a worst case scenario. That should help margins. It should also lessen capital spending.

Burke made a few other interesting points but the only one that seemed relevant to me was that Comcast is looking to more rapidly complete its own digital transition, ultimately eliminating analog video systems entirely. This would free up significant space on the network enabling more HD channels to be delivered, mitigating one of cable's vulnerabilities vs. satellite, especially versus resurgent DirecTV.

Comcast shares have performed relatively well this year, up a few percent. The stock has pulled back sharply form its May highs, however, as worries about competition and the seasonally weak 2Q have risen. The shares look cheap to me again ahead of what should be an inline quarter. And inline should be good enough for a pop in the shares. It is worth noting that despite my optimism I have not gotten long.

Cablevison: Cable Good But Strategy A Mess

Cablevision reported better than expected results driven by its core Cable operations and Madison Square Garden. Revenues grew 11% to $1.84 billion ahead of consensus of $1.78 billion. EBITDA grew 20% to $610 million, ahead of estimates for $560 million.

Financial and subscriber metrics at the Cable systems were better than expected. Revenues rose 8.6%, in line with expectations, while EBITDA rose 13.3% against consensus for 10% growth. The EBITDA beat provided about $15 million of the $50 million EBITDA surprise at the corporate level. Basic subs fell by 4,000 but analysts were expecting a fall of 8,0000 to 10,0000. Digital subs grew by 43,000, in line with estimates. Data and Telephone subs beat estimates rising 62,000 and 102,000 respectively....

....The rest of the beat in the quarter was at the MSG segment. "Lower provisions" for "tam personnel transactions" looks like it might have been a big positive swing factor. Also, the entertainment business grew nicely. On the call, management pointed out upside in entertainment at MSG including the acquisition of the Chicago Theatre. Recent speculation that Cablevision may invest more in this segment outside of New York seems plausible, especially if the company finally pulls the trigger on a sale of Rainbow. Rainbow had 9% EBITDA growth, wrapping up a very good year.

The big message from these results is that for now, Cablevision is dealing well with the competition from Verizon. If this is because Verizon is backing off a bit in New York as it grows FiOS elsewhere, the better than expected performance could prove fleeting. Or maybe Cablevision's superior network, excellent operating management, and well established incumbency is going to prove a stronger competitive advantage than expected.

I'm not sure and thus I have no opinion on the shares for now. They deserve to trade up on this quarter. Even more so given that Comcast's recent shareholder friendly actions have improved sentiment on cable stocks. Cable is also benefiting from the realization that cable vs. telco is not an either or investment decision.

Comcast Has Stabilized

Comcast reported good 1Q08 results. EPS matched estimates while revenue, EBITDA, and free cash flow exceeded estimates. Most subscriber metrics also beat estimates. Margins fell slightly as Comcast upped its marketing spending and began its aggressive rollout of service to small and mid-sized businesses.

Comcast's results closely paralleled those of Time Warner Cable. It appears that the cable industry has stabilized after a poor 2007. Both companies were able to accelerate subscriber growth with only a small sacrifice in margins. Both companies also saw stable capital spending. The mix of upper single digit revenue and EBITDA growth and stable capital spending means rapid growth in free cash flow. With both companies focused on returning cash to shareholders and investor expectations reset to a lower growth profile, the stocks should continue their recovery with additional upside of 10-15% possible in the near-term, especially if 2Q08 results, during the seasonally slow period, confirm the 1Q trends....

....In its Cable segment (95% of financial results), Comcast reported revenues of $7.916 billion and EBITDA of $3.142 billion versus consensus of $7.85 billion and $3.15 billion. Free cash flow grew 59% or $400 million. Capital expenditures were flat so that virtually all of the operating cash flow growth flowed to free cash flow. This is exactly the financial profile cable investors have been hoping for. In 2007, this model fell apart as revenue and operating cash flow growth decelerated and capital spending rose. If Comcast and the rest of the cable industry can sustain this performance for several more quarters substantial upside exists in the shares.

At the subscriber level, results were especially good. Comcast did lose basic subscribers (analog TV only). Basic subs fell 57,000 but this at the low end of expectations with several analysts looking for losses of 100,000 or more. Digital TV subs came in above most expectations at 494,000. High speed data had a big upside surprise with 492,000 net additions against expectations of 330,000. This performance reverses a recent series of disappointing high speed internet subscriber quarters. Stabilization in the housing impact, weak DSL performance by the telcos, and better marketing is helping. If these trends continue there is plenty of room for the telcos and cable to drive high speed data growth with neither industry suffering.

VOIP telephony additions were 639,000 also better than expected. While much is made of the loss of basic subscribers, Comcast added 11 times the number telephony subs than TV subs lost. I continue to ask why investors penalize cable so deeply for basic sub losses while giving telcos a pass.

Overall, Comcast reported exactly the type of quarter cable investors have been asking for since 2006. TWC, the #2 cable company, had similar results, suggesting that cable industry fundamentals have stabilized. The financial model is very attractive at the 1Q08 performance level. A few more quarters like this and cable valuations will head up, providing nice upside for shareholders even after the large gains the shares have enjoyed year to date.

2Q08 will be critical to determining the next big move in the stocks as it is seasonally weak creating risk that 1Q trends stall or reverse. An additional risk is that Comcast and the cable industry make a big play with major capital commitments to enter the wireless business. Surprisingly, the conference call had little questioning of management on its wireless plans.

Catching Up With Cable Stocks

Cable stocks have acted pretty well this year. Comcast is up a bit and Time Warner Cable is down slightly. Both have easily outperformed the S&P 500. The other large cap cable stock, Cablevision, is down about equal to the market but at year end it was still in the process of being taken private, a deal which fell apart.

The better action in the group is reflected in a better tone in the research I read on the group. I think the combination of dramatically reduced multiples, still reasonable growth of 8-10%, and lowered expectations is responsible for the improved stock prices and research tone.

The next big move in the stocks will be triggered by 1Q08 earnings reports. I think the shares trade up if numbers are merely in line. That means all numbers – subscribers, revenue, cash flow, and especially capital spending.

Despite the more hopeful outlook, there are two risks that are gaining added attention....

....First, the threat of mobile broadband to the high speed internet business is growing. Cable sat out the wireless spectrum auctions providing a relief to investors. However, with AT&T and Verizon making growing noise about mobile broadband, cable companies need to respond. The rumored joint venture with Sprint and Clearwire seems like a decent solution but regardless of the decision cable makes investors will be worried about the capital commitment. Look for a lot of questions on wireless on upcoming earnings calls.

The second risk is new noise on an old risk: a la carte programming. FCC Chairman Martin admits that he lacks authority to implement a la carte programming at the consumer level. However, the issue has regained some traction recently due to lobbying by the American Cable Association. The ACA represents small and rural cable operators. Many of these cable systems lack capacity and owners are frustrated by requirements from programmers like Viacom and Time Warner to offer only packages of channels. ACA representatives are lobbying hard for "wholesale a la carte" purchasing capability and Chairman Martin has indicated that he thinks the FCC has authority to implement it Whether he has the votes is another matter. For cable investors as long as the issue remains alive, it is a headwind.

Northlake is not long any cable stocks presently but despite being burned on Comcast in 2007, I'd be willing to get long if 1Q08 results meet expectations.

Stability At Comcast

Comcast provided the stability and achievable guidance that is required to get a relief rally and improve sentiment toward the shares. The financial and subscriber results for 4Q07 were very close to guidance provided on December 4th. If anything the financial results for revenue, EBITDA, operating margins, and free cash flow were slightly better than expected. I am going to ignore the quarterly detail to focus on the big picture.

Guidance was also constructive. Consolidated revenue and EBITDA are projected to grow by 8-10%. Capital spending is projected at 18% of revenues, implying a flattish number for 2008. Put it together and you get 20% free cash flow growth. Some analysts may have had higher revenue and EBITDA growth but 8-10% will come as no surprise and many investors will be pleased that it was not worse. Another small issue is that the guidance is for consolidated results. Over 95% of EBITDA comes from cable but the rest is content that grew 20% last year suggesting that cable only guidance is more like 7-9%. I suspect that this is supposed to be an achievable number with no downside.

Also contributing to the relief rally and my view of stability of financial results and sentiment is the fact that Comcast initiated an annual dividend of 25 cents providing a yield of about 1.5%. The dividend is supposed to go up over time and will stay near the established rate of 1/3rd of free cash flow.

Comcast also announced that the share buyback has another $6.9 billion to be completed by the end of 2009. The recent pace of share buybacks has been high enough to make this realistic and shares outstanding are down by about 86 million over the past year. Even accounting for share creep from options, upon completion the share count should be down by an upper single digit percentage from the year end 2007 level.

One final note is that the new CFO revamped the presentation which had greater detail on capital spending and more clearly laid out the growth plans and the capital allocation strategy. This will also serve to increase confidence.

The bottom line is that the worst appears over Comcast shareholders. I do not expect a big recovery in the shares but upside to the low $20s is clearly achievable if the company can report the next few quarters in line with the new guidance. If Comcast can convince investors that for the next several years it can grow at 8-10% with 20% free cash flow growth the shares are undervalued. I think they will probably prove it but I think it will take time for investors to come around....

....How do they grow by 8-10%? The company noted it was in five business: video, data, voice, commercial, and advertising. Video can grow in the mid single digits even with modest customer loss to the telcos due to price increases, more digital subscribers, more on demand revenue, and especially more DVR and high def subscribers. Broadband is slowing but if the company achieves 40% penetration that would be another 6-7 million subs over the next five years. Telephone is at just 10% penetration. Cablevision and Cox are north of 20% overall in the 40-50% range in some communities. Commercial is just getting started and Cablevision, Cox, and Time Warner Cable are already proving that a multibillion revenue opportunity exists for Comcast (Comcast had $31 billion in revenue in 2007). Finally, advertising was a $1.5 billion business in 2007 just from the cable systems which fell 3% in 2007 due to tough political comparisons. In 2008, political should bounce back and cable systems have plenty of market share to gain from local TV stations.

Cablevision Results Fall Short of Estimates

Cablevision (CVC) reported weaker than expected 2Q07 results and lowered 2007 guidance dealing another blow to the bull case for cable. Results were weak pretty much across the board with Telecom EBITDA and all subscriber metrics short of estimates. The only silver lining was lower than expected capital spending in thee quarter and a reduction in the 2007 capital spending forecast. This implies that as growth in cable slows, free cash flow should expand as capital spending related to subscribers adding digital TV, high speed data, and/or telephony will fall.

As expected, CVC provided no color on privatization transaction other than noting the shareholder vote was scheduled for the fall. There were a couple of good questions noting the discrepancy between the bullish guidance in the SEC filings made just six weeks ago and the lower guidance for 2007 issued today. Management's unwillingness to comment on this issue was disturbing.

CVC reported Telecom revenue growth of 13%, close to estimates, but EBITDA growth of just 4%. The margin contraction was attributed mostly to increased marketing spend in response to Verizon's rollout of its FiOS TV and internet products. CVC management says that Verizon's subscriber uptake is no different than what they assumed earlier this year but the marketing spend in support of FiOs is enormous so CVC had to respond....

While I have used CVC's growth pattern as a forecasting tool for Comcast since it is two years ahead in its rollout of the triple play, one area where CVC differs form the rest of the cable industry is in its exposure to Verizon. CVC has 100% overlap with Verizon while all other cable companies have well under 50% exposure with most in the 30-40% range. Given the slow and geographic concentrated rollout of FiOS I think that the increased impact that CVC appears to be feeling may not translate to the rest of the industry over the next six to twelve months.

Investors will still worry though as they will not pay up for cable's growth if they believe it will wind down more rapidly than previously expected. Comcast and Time Warner Cable must deliver better 3Q results to rebuild confidence and show that low to mid-teens growth for the next few years is still on track.

One other potential troubling item from CVC was a comment that they are extending triple play pricing to existing customers. Despite a few questions, I did not get clarity as to exactly what this meant. I believe that it means that customers who reach the one year expiration of the $99 triple play will be offered the same pricing to renew. Previously most customers incurred a price increase to $129. This may be making a mountain out of a molehill as most triple play customers buy extra services like DVRs, HD, pay per view, and specialty channels and already pay $130-150 per month to CVC.

CVC is now forecasting no growth in basic subscribers for 2007, down from a previous forecast of up 1-2%. New service subscriptions (RGUs or revenue generating units in cable lingo) are now forecast at up 825,000 to 900,000 down from a prior forecast of 825,000 to 950,000. Revenue growth has been revised downward from mid-teens to 11% and EBITDA growth from mid-teens to 10%. Bears will be worried that growth will decelerate rapidly after 2007. Bulls will note that CVC is still growing double digits and capital spending is winding down.

Stable Pricing Bullish For Comcast

One of the reasons I remain bullish on Comcast (CMCSA/CMCSK) is that the much feared price war over the components of the triple play – cable TV, high speed internet, and telephony – has not come to pass. In fact, what has long been feared to be a fight to the death is looking a little more like oligopoly with rational competition. If evidence continues to mount that pricing will be firm over the next eighteen months, recently soured sentiment toward cable should improve dramatically. Add that to quarterly reports showing low to mid teens growth in revenue and operating income from Comcast and the other major cable companies and a sharp rebound in CMCSA shares is setting up. I own a small position in CMCSA and CMSK today and have an itchy trigger figure to build it out to a full position.

Last week two separate research reports came out that noted the benign pricing environment. Cable analyst Jessica Reif of Merrill Lynch and her telecom counterpart David Janazzo noted that that cable companies and their satellite counterparts each increased pricing on TV services by 1-5% this spring. Verizon (VZ) and AT&T (T) are just getting started in TV but thus far they are not competing on price. Merrill Lynch also noted that high speed internet pricing is stable with cable holding pricing and VZ and T eliminating most of their super discounted, entry level DSL packages. Telephony pricing has also been stable with cable using the triple play bundle and VZ and T responding through bundles of their own rather than discounting their cash cow....

Credit Suisse came to similar conclusions when updating a report on the pricing of the bundled service packages. They found that the companies were not competing on price, with most bundles having shown little price change vs. a year ago. Competition was intense but the companies were using "marketing gimmicks" and differentiated products (e.g. higher speeds for cable internet) to entice consumers. Credit Suisse also noted that there is very little difference in pricing between the cable and telephone company bundles and that most customers end up paying more than the $99 triple play price because of the attraction of DVRs, high def TV, and premium channels.

If pricing holds and quarterly revenue and EBITDA growth continues to impress, the one remaining obstacle to improved performance for cable stocks is a plateau in capital spending as a percentage of sales. This would indicate that EBITDA growth would translate to free cash flow and entice investors to pay up for the 14% three year CAGR in EBITDA that Comcast management recently forecast.

I think that investors will find reason to believe as the next tow quarters are reported. I'm probably being a little too cute but I am looking to up my position in Comcast closer $25. My feeling that the market ahs entered a more difficult period is weighing heavily on my desire to look for another buck lower before pulling the trigger.

A Hedge Fund Manager Responds To Comcast Going Private

In response to yesterday's post about the Bernstein analysis of Comcast as a private equity buyout candidate I received an email from my good friend and media confidante KG, who is also a hedge fund manager. As usual, KG is thought provoking:

I read that Moffett analysis yesterday, and also read your piece. Such rationalization for an attractive stock price actually worries me a bit, which shouldn't surprise you. His whole thesis is predicated on the EV in five years being over 8x EBITDA at that time. The math works at that level, but what if the exit multiple was, say, 6x? That $10 billion of upfront equity will have grown all the way to..........$11.7 billion, hardly great LBO economics.

Extrapolating the crazy present LBO environment into the distant future could be dangerous. I think CMCSK is on the cheap side of "reasonably valued" and I own it in my fund. But the way I look at it is if they do everything they say they will do by 2009, FCF/share might be about $2.25. At a reasonable 6% FCF yield, the '09 stock price would be $37.50. Assume that happens in late '09, 30 months from now. That gives us a prospective stock price appreciation of 15% per year for the next 2 1/2 years, decent for a big cap quality cable play but hardly "stupid cheap".

KG is an appropriately skeptical investor and is currently bearish on the market which explains the "shouldn't surprise you" comment. His points are valid and I would point to another stock he and I often discuss, Virgin Media (VMED) as evidence supporting his case. VMED trades around 6 times current year EBITDA reflecting slow growth in the brutally competitive UK environment for triple play services. One could certainly make the argument that the US will trend toward the UK environment over the next five years as AT&T (T) and Verizon (VZ) go national with their multichannel TV offerings, higher speed wireless data offerings become prevalent, and browser based video becomes more widely adopted....

On the other hand, US cable companies still have several growth levers to pull while telephony and high speed data growth remains robust. An article in yesterday's Wall Street Journal referenced cable's growing focus on interactive advertising. Additionally, cable companies are ramping up services for small and mid-size businesses. Both areas could be multi-billion dollar revenue generators five years from now.

The bottom line is that KG is right to be skeptical and throw some cold water on the Comcast buyout thesis but if cable is able to sustain upper single digit revenue growth and stable margins in the out years, the numbers work. I am a believer.

Is Comcast A Candidate For A Private Equity Buyout?

One of the ways I keep up on all things media is through a Google email alert on Providence Equity, which is the major media focused private equity firm. An alert I received yesterday contained a link to an article discussing a note that Bernstein put out last week mentioning Comcast (CMCSA/CMCSK) as a perfect candidate for a private equity led buyout. The purpose of the Bernstein note was not to suggest that Comcast would go private but rather to note that if the numbers worked so great for private equity then the stock was probably significantly undervalued. If there is anything regular readers of Street Insight know it is that I am bullish on Comcast so this I find angle on the bull case especially interesting.

This is really just an intellectual exercise as Comcast has an $80 billion market cap and about $30 billion in debt. It seems like private equity can finance anything these days but a deal of that size, before considering any premium, seems impossible. Then again, with all the liquidity floating around it could probably be financed. My spread sheet has Comcast generating $12.1 billion in EBITDA this year. I've seen plenty of private equity deals with debt to EBITDA at 8-9 times. Bernstein suggested banks would lend at 8.5 times, which works out at $102 billion in debt. Against Comcast's current enterprise value of $110 billion that would leave the need for just $8 billion in equity before any premium....

Interest expense on $102 billion in debt might be around $8 billion. Subtract capital spending, working capital, and cash taxes and Comcast would probably have a modest cash shortfall in the first year or two of a deal but with EBITDA growing at 14% per year over the next three years (as guided by management two weeks ago) and free cash flow growing by 20%, by the third year, Comcast could start paying down debt.

According the article referencing the Bernstein research, debt could be less than $100 billion in five years while EBITDA would be around $18 billion. Put an 8 multiple on $18 billion and deduct $100 billion in debt and the equity value of Comcast would be $44 billion against the theoretical equity value today in a private equity led buyout of just $8 billion.

In other words, at current prices, Comcast looks awfully cheap in a private equity model. And as Bernstein's excellent analyst, Craig Moffett, noted, if it is that cheap to private equity today it must be severely undervalued in the public market. Do I hear a massive share repurchase and/or a large special dividend or meaningful recurring dividend coming?

As my good friend Doug Kass likes to say, "Makes me go hmmm."

Where Are All The New Cable and Satellite TV Customers Coming From?

One oddity in the current multichannel television landscape is that all the major players are gaining subscribers despite what most observers would consider a pretty intense competitive environment in a mature industry. My rough calculations suggest that DirecTV and Echostar's Dish Network will add about 2 million subs combined this year. Verizon and AT&T could add another half million and the major cable players could add a few hundred thousand.

With about 90% of the 110 million US households already having multichannel TV, it is hard to see where 2.5 million new subscribers are coming from each year. I discussed this with Spencer Wang, lead media analyst at Bear Stearns. Among the possibilities we came up with are a gradual increase in multichannel penetration, new household formation, households taking both satellite and cable, more subscriptions from bars and restaurants, or alternative venues like supermarkets or airplanes....

Growing penetration offers the most upside as 1% is over 1 million households. I think households with both cable (or telco) and satellite are probably growing rapidly. The triple play at $99 is usually no more than a household is already paying for two services so adding the third and keeping satellite TV could be account for a lot of new subscribers. Spencer reminded me that cable offers low priced analog service known as lifeline which is usually just local channels plus a few cable channels. This could lead to a lot of double counting but I don’t think that product is being marketed at all unless it is a retention tool when a subscriber switches to satellite.

I think this is an important question as the competitive environment in the satellite/cable/telco battle has not been quite as fierce as feared. Pricing is the best evidence and average monthly revenue per user for individual services or a bundle of services has been very stable over the past couple of years. I think this is a major reason why cable, telco, and satellite stocks have all done well.

How the companies react if net subscriber growth flattens or goes negative will be key to the future of the stocks. If the focus is on churn reduction and profit per subscriber as opposed to discount pricing the still feared showdown between cable and telco could continue to be more perception than reality. If pricing becomes weapon, the market will treat all these stocks very badly.

I am hopeful that a window of less competitive pressure will remain open through 2007 and 2008. If so the stocks look good across the board. But I'd sure feel better if I had a better idea where the new subscribers would come from so that all competitors can remain reasonably happy.

Cablevision 1Q07 Earnings: Going Private But Meaningful

After listening to the Cablevision (CVC) conference call, my initial impression that the cable bears came away with more ammunition should have been a more balanced view. That said, the sentiment battle facing cable stocks is likely to remain difficult while the stocks do not reflect close to fair value in my opinion.

CVC reported revenue and EBITDA growth of 15.5% and 12.6% in its cable operations. Both figures were below estimates and EBITDA margins fell slightly. Management noted that the company did not take an across the board price increase this year and does not expect to later in the year. With programming expenses stepping up due to annual inflators and new costs for Fox Sports NY, margins were squeezed.

Penetration rates for CVC are very high. Over 80% of basic cable subscribers now take digital cable. High speed data is taken by 46% of homes passed and 67% of the basic cable subscribers. Even telephony, a newer product, is taken in 29% of homes passed and by 62% of current high speed data subscribers. Slowing growth is inevitable as penetration rates approach these levels, especially as competing products from Verizon (VZ) are deployed more widely.

Management did admit, as it had done on the 4Q06 call, that VZ's FiOS rollout was impacting CVC....

Specifically, churn is up in basic cable and high speed data subscribers. CVC is no facing FiOS in about 25% of its footprint. While the triple play is causing changes in how cable does annual pricing reviews, I suspect it is a good assumption that CVC chose not to increase prices as a competitive response to VZ. The bears will claim this point.

Bulls will note that despite industry leading penetration rates for its services, CVC is still growing at a very healthy rate. In other words, despite the competition from VZ, three years into the triple play rollout, CVC is still growing EBITDA at solid double digit rates. Management stood by its full year guidance for mid-teens growth, implying a pickup in future quarters.

Bulls will also note that as CVC reaches relatively mature levels of penetration for its products it s capital intensity is falling. Capital spending trends will benefit as new subscriber growth slows because there will be less need for new set top boxes and cable modems. Thus, as growth slows returns begin to rise.

The key question becomes how much does growth slow and will pricing pressures on established customers develop such that the returns on the highly profitable and moderately growing base begin to fall. Comcast and Time Warner aren’t likely to face this problem for a few more years because their rollout of the triple play lagged CVC. Comcast reiterated its growth profile at its analyst meeting on Tuesday by stating that it expects that 2008 and 2009 growth in revenue, EBITDA, and subscribers will at least match current 2007 guidance.

I side with the bulls and feel that cable stocks are significantly undervalued relative to likely growth rates over the 2007-2009 time frame. However, I think it will be very difficult to swing sentiment towards cable back to the bull camp over the next few months. I have no trouble maintaining long positions or getting longer in Comcast or Time Warner Cable (TWC), it just might require some patience to get the payoff.

Time Warner Cable: First Quarter As Public Company Shows Promise

Time Warner Cable (TWC) reported good 1Q07 results. Investors will cheer the solid performance at the company's legacy cable systems and signs of improvement at newly acquired Adelphia systems. The cable business is very healthy for all companies providing a solid foundation for growth at TWC. TWC has the added benefit of bringing its newly acquired systems up to industry standards which will drive above average gains in revenue, EBITDA, free cash flow, and subscriber growth. 1Q07 results indicate that progress at the acquired systems may be a little ahead of schedule and that is good news for TWC shares.

TWC reported revenues of $3.85 billion and EBITDA of $1.31 billion. Revenues were slightly below the consensus but EBTIDA was on target implying that margin performance was good. In fact, margins came in at 33.9% vs. my expectation for 33.5%. On the call management said that further margin progress would be evident in the seasonally weak second quarter (college students and snowbirds disconnect) and that results should accelerate in second half as previous guidance suggested. TWC's EBITDA margins is running 300 basis points behind Comcast (CMCSA/CMCSK) providing ample and easily achievable upside over the next year or two.....

At the subscriber level, TWC exceeded analyst estimates. Basic subscribers grew by 46,000 vs. expectations of 10,000. Upside occurred at legacy and acquired systems. The improvement at legacy systems shows that the triple play still has great marketing power even after more than a year of the national rollout. The reduction in lost customers at the acquired systems suggests that progress is occurring at or ahead of schedule.

Digital and high speed data subs both beat estimates with upside at both legacy and acquired systems. Telephony additions improved over the weak 4Q06 performance but only met expectations. Telephony additions at the acquired systems beat analyst estimates, a good sign for the future as Adelphia systems trailed industry trends severely in telephony.

Capital spending was as expected, higher but driven by success-based spending on customer premise equipment. As long as the return on this spending is adequate, investors should not complain about elevated spending. Given improving margins and falling churn, I think the returns are just fine.

The bottom line is that TWC looks attractive but the upside is an industry call. I think sentiment toward cable stocks has gotten too negative in recent months. Results from 1Q TWC and Comcast and Comcast's confident long-term guidance issued yesterday should begin to turn the sentiment and push the stocks back to and through the 52-week highs in coming months.

Comcast: Buy on Weakness

Comcast (CMCSA/CMCSK) reported solid first-quarter earnings of 26 cents per share on revenue of $7.39 billion. These numbers were extremely close to consensus estimates and all financial and subscriber metrics. The figures did not provide the upside to consensus estimates that I and others were expecting, however, following very bullish comments from CEO Brian Roberts at several Wall Street conferences over the past couple of months.

The results reinforce my positive view of Comcast shares and my belief that they will trade at significant new highs during 2007 but are likely to be met by selling initially due to the lack of upside in the numbers. I am very close to adding Comcast to Northlake client accounts and will limkely pull the trigger if siginficant weakness occurs....

In the cable segment, Comcast reported 12% revenue growth and 14% earnings before interest, tax, depreciation and amortization (EBITDA) growth, exactly on target with the company's full-year guidance. Analyst estimates were at or very, very slightly above the reported figures. Subscriber metrics met or exceeded guidance except in telephony. Basic subscriber gains matched expectations, while digital TV and high-speed data exceeded estimates. VoIP Telephony adds of 571,000 trailed expectations of a little over 600,000 and will be a point of contention. Average revenue per user was very solid across all products.

Management maintained guidance across the board, including revenue and EBITDA growth, subscriber additions and capital spending. I had hoped for an increase in guidance, but I still think that is in the cards as the company matched full-year growth targets in the first quarter and Roberts is quoted in the press release as saying that the year is off to a great start with "increasing momentum." I'd interpret that as meaning above first-quarter growth rates, which means above current guidance.

Finally, I'd note that capital spending matched expectations, up about $500 million vs. a year ago; $300 million of the increase is related to customer premise equipment like telephone and data modems, DVRs and digital set-top boxes. In other words, the growing spending is directly related to a growing subscriber base for all products. If the return on this investment is satisfactory, then Comcast should be spend the money. It takes investment to grow sometimes. I think Comcast is making the right choice.

More Comcast Internet News

Just a few hours after Monday Morning Media Madness noted that Comcast (CMCSA/CMCSK) was building some potentially valuable and underanalyzed internet assets, the following crossed my email box from theflyonthewall.com:

News Corporation, NBC Universal and Comcast Corporation announced a comprehensive distribution agreement in which Comcast's Comcast.net and Fancast.com will serve as key distribution sites for News Corp. and NBCU's recently announced online video venture.

As a reminder, Comcast currently has 11.5 million high speed internet subscribers, 70% of whom use Comcast.net as their homepage. By year end, Comcast's high speed internet subscriber base should grow to over 13 million.

Search on Comcast.net is powered by Google and one analyst has informed that Comcast could provide 3% of all the searches done on Google. Comcast currently generates about $70 million from this relationship and the deal is up at year end 2007. Given the battle for eyeballs on the web as Google, Yahoo, Microsoft and AOL battle searches and ad inventory, Comcast seems to be in a prime position to dramatically up the value of its search deal....

If Fandango and soon to launch Fancast (Comcast's new site "that will enable users to view video as well as search, discover and manage both TV and movie content") can help build traffic owned by Comcast it won’t be long before investors begin see that Comcast is more than just a distribution network that is expensive to maintain. The existence of the network itself gives Comcast the ability to build its own content assets.

We have seen this before in cable when John Malone used his control of the then largest cable company – Telecommunications, Inc (TCI) – to build valuable content assets. In those days it was cable TV networks, either those controlled by TCO or those controlled by others but looking for distribution.

The economics on the net aren’t as good as for cable networks but control of the distribution pipes has many ways to create value for Comcast shareholders. Whether it is through selling an additional product (telephone), selling additional services on existing products (DVRs, HD, VOD for TV or small and mid-size business for internet and telephone), or generating massive internet traffic that can be monetized through paid search and display advertising, the investment necessary to build and maintain the pipes can be produce high returns for shareholders.

Comcast CEO Gives Bullish Interview

Comcast shares are traded up sharply yesterday in a lousy tape following publication of a couple articles on Bloomberg reviewing an interview with CEO Brian Roberts. Roberts is reiterating comments he made several weeks ago at a Wall Street conference indicating that he is “more confident” now than he was in February when the company issued guidance about the company’s growth prospects. Roberts says “Right now, it’s all clicking, everything is on fire.”

I have been adamant that investors overreacted to the higher than expected 2007 capital spending number that was part of the 2007 guidance. Investors completely ignored that the higher than expected spending was in response to higher than expected subscriber growth. Furthermore, there were no indications that the faster growth was being driven by lower margins. The message finally seems to be getting through.

Despite the lift in Comcast shares I still think that the stock should be owned ahead of the company’s earnings report late this month (see bottom of this post). I think Roberts' latest comments suggest that the numbers will be quite good, likely ahead of analyst estimates in all key financial and subscriber metrics. This would be enough to push Comcast back to or above its all-time high of $30 reached in mid-January.

Upside From Comcast's Internet Advertising Business

In what should be good news for Comcast (CMCSA/K), the Wall Street Journal reported in its Weekend Edition that Comcast is unhappy with its current relationship with Google (GOOG). Under an agreement that expires at year end, Google provides search for Comcast.net. According to the Journal, Comcast is actively shopping its internet search relationship with the possibility that Microsoft (MSFT) or Yahoo (YHOO) could displace Google. The Journal also indicates Comcast is looking to sell 80% of its display advertising inventory to Microsoft, Yahoo, or the AOL division of Time Warner (TWX).

Given the battle for search and display inventory Comcast stands to see a big boost in its annual take from these sources. According in the Journal, in search alone, Comcast is currently receiving about $70 million per year from Google. Comcast believes that they should be receiving at least $100 million. Comcast.net is the 17th most trafficked site on the net and provides around 7-8% of all of Google's searches.....

I suspect that Comcast will get a deal somewhat similar to the Google deal with MySpace, which is owned by News Corp (NWS), where Google guaranteed MySpace a minimum annual revenue stream. Given Comcast's growing strength as a broadband provider (11 million subscribers now, 13 million by year end, 70% of which use Comcast.net as their home page), it would seem that a doubling or more in Comcast's revenue from search and display advertising is in store in 2008. From this higher base, Comcast should grow this revenue stream at a nice premium to overall internet advertising growth as the base of broadband subscribers should continue to grow.

I made a few calls to analysts early last week when I first learned that the Comcast-Google deal was up at year end. As far as I can tell, analysts do not have a one-time boost in revenue and EBITDA (flow through should be close to 100%) from search and display advertising in their models for Comcast in 2008. Comcast is expected to have about $12 billion in EBITDA in 2007 and grow by about $1.3 billion in 2008 or 11-12%. An additional $100 million (?) pushes the EBITDA growth rate up more than 80 basis points. Not huge but not chump change.

I think it is an excellent time to be buying Comcast. The stock has pulled back from $30 to $25.50 since mid-January. Today's news should help sentiment. Additionally, CEO Brian Roberts recently indicated at a Wall Street conference that 1Q07 is shaping up better than they expected when they gave guidance in mid-January. Last year, Comcast reported 1Q results on April 27th. I think being long prior to that report is a good idea.

Charter Communicaitons: Getting Better But Not Good Enough

Charter Communications (CHTR) final 4Q06 results very closely matched the preliminary results reported on February 9th. Revenues rose 11.7% and EBITDA rose 10.3%. Revenues matched analyst expectations and EBITDA was a little ahead due to better than expected margins. A loss of 43,000 basic subs was an unexpected negative and much of the conference call Q&A was used to explaining the issue. CHTR also used the conference call to expand on its recent balance sheet refinancing activities and hint about future moves.

Overall, CHTR is moving in the right direction. New leadership has made a difference. There is now a plan and better explanation of what is happening now and might happen in the future. The company's financial performance is starting to converge with the cable industry with double digit gains in revenue and EBITDA on the back of accelerating growth in VOIP Telephony and the triple play....

CHTR shares have benefited from improved execution, financial performance, and balance sheet refinancing. CHTR is now fully funded thru 2008. Improving financial momentum and reduced liquidity pressures means that the option value of CHTR's equity has improved sharply. But don’t forget that debt is 10-11 EBITDA above the value of all other cable companies. That means that there is no value for shareholders unless CHTR can eventually begin to pay down debt. The company is on the right track but it won’t happen in 2007 and 2008 and beyond that the competitive environment for the cable industry could stiffen. As a result, I would not be long CHTR unless it declined significantly from recent trading levels.

Regarding the basic sub loss, CHTR explained that it re-priced its TV offerings to much of the subscriber base in 4Q. That is a nice way of saying they raised prices more than usual. Some subscribers defected but CHTR feels they weren't losing valuable customers. It sounded like the losses could continue in 1Q as the remainder of the customer base is notified of the price increase. As long as the losses subside following 1Q, I don’t see this as a problem. CHTR is focusing on its better customers who are willing to take the triple play. That is a good strategy for any company but an especially good one for a company that is overleveraged.

While I remain negative on CHTR at current prices, I want o to reiterate that the outlook has improved substantially as the new management team is executing a well thought out strategy. Everything about CHTR has improved over the past year: communication with shareholders, financial performance, clustering of systems, the balance sheet. Management deserves credit.

One final note…Paul Allen was quoted in the press release discussing his bullishness on CHTR and the cable industry. This was a big deal for the analysts as he has been very quiet leading many to wonder if he still had faith in his large investment in CHTR. I have no idea what to read into Allen's sudden reemergence but it will likely get play in follow-up analyst reports.

Cablevision Results Are Good News For The Cable Industry

The most important takeaway from 4Q06 results from Cablevision (CVC) is that there is no negative read through for the cable industry at large. CVC has the deepest penetration of advanced services of any cable company and faces the most competition from Verizon's fiber overbuild. Following recent concerns about the cable industry following higher than expected capital spending at Comcast (CMCSA/K), investors were anxious to hear what CVC had to say. CVC is essentially where Comcast will be in two or three years in terms of penetration and competition so the fact that CVC hit expectations, provided solid 2007 guidance, and did not increase capital spending expectations is favorable for sentiment toward the cable industry. I remain bullish on cable for 2007 with the caveat that the easy money has been made and risks are moderately higher....

In 4Q06, CVC reported 18.6% revenue growth and 16.8% EBITDA growth from its cable TV operations. Cable TV represents about 90% of the company and is all anyone cares about unless asset divestitures are planned for the Rainbow networks or the NY sports teams. These results were inline with expectations although another percentage point in EBITDA growth would have been nice.

Subcriber metrics came in slightly below expectations across the board. Basic susb rose 16,000 against expectations for 20-25,000. Digital subs grew just 82,000 against hopes for 100,000. High speed data growth of 75,000 fell short of expectations for 85,000. VOIP Telephony did hit targets with 110,000 new subscribers.

I think the slight shortfalls indicate that analyst models need to be tweaked to adjust subscriber growth downward respecting the industry high penetration rates CVC has in the triple play. In particular, digital TV is at 78% penetration which management indicates is effectively mature given the economics of getting the remaining 22% to upgrade.

Higher penetration does not mean growth will slow significantly, however. Analyst pressed management very hard on this topic on the call and management effectively noted that HD, DVRs, interactive advertising, and other emerging revenue streams could drive growth at very good economics. Furthermore, capital spending is not going up at CVC in 2007 indicating that a more fully penetrated cable system does not require incremental capital spending. This is bullish for the industry and indicates that Comcast's explanation that better than expected subscriber growth is driving rising capital spending is a fair argument.

CVC stated that VZ was servicing between 600,000 and 850,000 households in its markets TV or FiOS internet. According to CVC, penetration of TV is low for VZ even in markets where it is most heavily promoting the service. That said, CVC did indicate that in a couple of communities it saw about a 5% drop in its own TV penetration when VZ came calling. However, in those same communities, CVC was able to continue to increase penetration of its VOIP Telephony and high speed data services.

CVC's 2007 guidance calls for mid-teens growth in revenue and EBITDA from its cable division on flat capital spending. I think this is good news relative to expectations and recent fears as investor sentiment toward cable has soured. CVC is forecasting a slowdown in RGU growth but all of the shortfall is in digital TV and the aforementioned alternative revenue streams allowed by having a digital set-top in the home still can drive revenues.

CVC is more heavily leveraged and produces less free cash flow than other cable companies. CVC also has the difficult to deal with Dolan family in control. For these reasons, I prefer Comcast or Time Warner Cable (TWCA) but solely at the operating level CVC is every bit the equal of its peers and asset value is near $40 if a true open auction ever took place. Thus, I have no argument with anyone who prefers CVC to Comcast or TWCA.

Comcast: Capital Spending Should Not Be Penalized

Comcast (CMCSA/CMCSK) reported 4Q06 results that were very close to extremely high expectations. Guidance for 2007 is also very close to current analyst expectations with the notable exception that 2007 free cash flow is forecast the same as 2006 due to an increase in projected capital expenditures as Comcast expects to sign up more customers than anticipated. The lack of upside in the numbers and the debate likely to be triggered by the free cash flow and capital spending guidance will probably lead short-term traders to push Comcast stock lower today. However, I see nothing to that significantly concerns me about the 2007/2008 outlook for the shares and think they will be comfortably higher than current prices by the end of 2007.

On a pro forma basis, 4Q cable revenue and EBITDA growth were 14% and 17%, respectively. These growth rates represent the highest level of any quarter in 2006. As mentioned, the numbers tracked very closely to analyst estimates. At the subscriber level, basic video additions were the highest in years at 110,000. I think this is attributable to the success of the triple play which not only gives households a reason to add or switch ot Comcast but also lowers churn. High speed data additions were 488,000. Growth here remains very storgn with stable ARPU. Penetration stands at 25% leaving plenty of upside for continued growth as broadband becomes more pervasive due to the inceasingly data and video intensive content on the web. Digital TV susbscirbers were also storng, up 613,000. Unlike some prior quarters in 2006, more of these additions were taking higher end digital packages. VOIP telephony sign-ups were a little bewlo some estimates at 508,000 but this is a booming business with quarterly revenue up 77%, a level that should proved sustainable thorugout 2007.

The free cash flow and capital spending forecast is sure to re-ignite the criticism that the cable industry never rewards shareholders.....

because it must constantly invest in a high cost infrastructure to support growth. In this case, I don’t buy it. Capital spending is expected to rise by $1.1 billion in 2007 to $5.7 billion. $250 million is dedicated to preparing for Comcast's assault on the small and mid-size business market, a multibillion revenue opportunity. Another $150 million is for upgrades to newly acquired systems as part of the Adelphia deal and unwinding of partnerships with Time Warner (TWX). Neither of those items was in analyst forecasts. I don’t see the big concern about a $700 million increase in capital spending, up 15%, when the company has forecasted 30% in revenue generating units (each digital TV, high speed data, or VOIP addition is an RGU). RGUs are actually up 40% given the planned loss of 500,000 traditional phone subscribers acquired from AT&T years ago.

Furthermore, management pointed out that 50-60% of the incremental $700 million is due to equipment installed at households to enable the triple play services. This is mostly modems and advanced set top boxes. If the RGU's average $30 per unit per month, Comcast is adding an annual revenue base of $2.5 billion. If margins just match the corporate average, this equates to incremental $1 billion in annual EBITDA. Management calculates a 25% ROI on this capital spending. And that doesn’t; give the company any credit for building new and/or stronger relationships with historically low churn customers ahead of a more substantive entry into TV services by Verizon (VZ) and AT&T (T).

The bottom line is that not all capital spending is bad and sometime the correct decision is to invest in your business. When that investment is merely incremental cash flow and can be invested at a return of 25%, the justification for increased capital spending is even greater.

Oh yeah, Comcast is still going to produce over $2.6 billion in free cash flow in 2007.

Here's hoping that knee-jerk traders knock the shares back into the $40s…that would be a good place to enter the shares for upside of 20-25% over the balance of 2007.

A Potential Headwind For Comcast

Keep on eye out for some negative publicity that could hit Comcast (CMCSA/K) in the next few weeks. Sinclair Broadcast Group (SBGI) and Comcast are getting close to the drop dead date over their negotiations for payment of retransmission fees by Comcast to Sinclair so that Comcast can continue to carry the TV broadcast signals of Sinclair local TV stations. If no deal is struck, Comcast customers could lose access to Sinclair's network affiliated TV stations is some pretty sizable markets. Fights like this have garnered national publicity in the past.

Historically, cable operators have not had to pay cash for the right to retransmit signals of local broadcasters. Cable operators do pay cash to transmit the signals of cable networks such as ESPN, CNN, and HGTV. Typical fees range from 20 cents per month per sub for a less popular cable network to $2.50 per month per sub for ESPN. In fact, a significant part of your monthly cable or satellite bill is nothing more than these fees being passed along to you.

Sinclair and CBS (CBS) have been leading the charge for retransmission fees over the past year....

Les Moonves talks about it all the time and hopes to begin receiving 50 cents per month for his CBS signal in 2009/2010 when many of the current retransmission deasl expire (those deals gave local TV stations no compensation --- usually it was traded for carriage of newly launched cable networks by the corporate parent).

Sinclair has had a big fight with a small cable operator, Mediacom (MCCC) which has led Sinclair to take their signal off of MCCC's cable systems since early this month. MCCC serves mostly smaller markets in places like Cedar Rapids and Iowa City. Last week, Sinclair came to an agreement with Time Warner Cable (TWCAV) where TWCAV agreed to pay an undisclosed retransmission fee. MCCC quickly announced that they would agree to the same deal but Sinclair has yet to say yes as no doubt they gave TWCAV a big volume discount as the second largest cable operator in the US.

So far, Comcast has taken a hard line in public stating they do not plan to pay retransmission fees. Comcast says that local TV is free to anyone with a TV and an antenna and taxpayers are already "paying" for the signal by virtue of the government having given away the right to provide the signal free of charge.

In reality, I am sure that Comcast has no interest in paying an average of maybe 25 cents per month per sub for each of its 25 million subscribers. Even if you multiply that times four for ABC, CBS< FOX, and NBC, the money isn't huge by Comcast's standards, maybe $300 million a year against an EBITDA base of over $10 billion, but any payment comes directly off the bottom line.

Nevertheless, the stakes for Comcast are high. Sinclair reaches about 3 million households in Comcast territory according to Lehman Brothers. And these are subscribers are in sizable markets such as Pittsburgh, Baltimore, Minneapolis-St. Paul, Richmond, and Tampa Bay. The drop dead date is 2/5/07 and apparently Comcast is warnings subscribers in these markets they may lose Sinclair signals after that date. Sinclair has a lot of Fox stations so that means bye-bye American Idol is some cases.

I suspect that if it goes down to the last minute or the signals are pulled it will be a pretty high profile story with a lot of media coverage. Prior battles of a similar nature recovered a lot of press. As I stated, the financial stakes for Comcast aren’t too high but the shares have had a huge run and sentiment is now very positive. Therefore, if this blows up to a national story, there could be some downside in Comcast shares.

If so, use it to buy more as the story looks very good over the balance of 2007 and into 2008 as stable pricing, continued penetration of the triple play, and initial forays into the small and medium business market should drive double digit revenue , EBITDA, and free cash flow growth.

Commercial Is Cable's Next Big Opportunity....But Is The Industry Ready?

Bears Stearns Cable Analyst Spencer Wang recently held a conference call with a couple of experts on the opportunity that the cable industry has to offer commercial services. Today, cable is primarily a residential business with commercial customers representing less than 5% of revenue.

According to Bear Stearns, the revenue opportunity for cable in commercial services is $40-50 billion. To put that in perspective, the five big publicly traded cable companies (Comcast, Cablevision, Charter, Cox, and Time Warner) are projected to have cumulative revenue of about $60 billion in 2006. The commercial opportunity includes small and mid-size business with up to 100 employees, hospitals and health care facilities, lodging, government buildings, schools and wireless backhaul.....

Last quarter cable industry observers were a little disturber by slightly slower than expected growth in cable telephony subscribers at Cablevision and Time Warner. Nobody was overly worried but it make me think that it would be important for the cable industry to begin discussing the next big opportunity that would keep investors believing in double digit long-term revenue and EBITDA growth. Commercial services could be the answer.

That said, my firm, Northlake Capital Management, had a very bad experience on Wednesday with the commercial services of Comcast. The building where I rent an office offers T-1 broadband access with the monthly rent but the service occasionally goes out. As a result, I decided to add Comcast high speed data as an alternative so I had virtual certainty I would be up 100% of the time.

Comcast promised they would complete the install between 8AM and 5 PM. They also promised an early morning call to give me a rough idea of what time they would arrive. By 10 AM IU had heard nothing so I called customer service. The woman who answered was pleasant and helpful but it was clear that she could not access any information about my account beyond the name and address. It took her about 20 minutes to get through to dispatch and assure me that the installation was scheduled.

By 2 PM I still had not heard anything from the installer so I called back. This time another helpful customer service representative said that there was nothing in her database that indicated Northlake had even ordered the service. I explained that someone earlier had confirmed with the install dispatch that we were scheduled. After about ten minutes, the representative said she was able to talk to another part of commercial services and we were in fact scheduled for installation and that the installer had until 8 PM to show up. Seeing as it was Thanksgiving eve I wasn't happy but I work less than a mile form home so I put a note on the door, went home and waited for a call. It never came.

I am not a big believer that isolated incidents like this can be extrapolated into a broader investment theme. However, give the cable industry's long-standing customer service issues I do wonder if the industry has built the internal service and installation infrastructure to rollout commercial services.

Comcast was penalized severely by investors when it completed a slow rollout of VOIP telephony. Management consistently said it wanted to make sure it was able to deliver a consistent, high quality customer experience and would accelerate the rollout when it was ready. Other cable companies were running ahead of Comcast which raised concern that the problem might be unique to Comcast.

I don’t think that cable investors have a big expectation for commercial services but as we move into 2007 and concern begins to grow that high penetration of the triple play will lead to slowing growth, commercial could step into the breach. I hope the industry is ready to deliver.

Update: After another no-show by Comcast on November 27th, they finally showed jut before closing on the 28th and got the install completed. The service is great: much faster and more reliable than a T-1, however, it is clear that at least in Chicago, Comcast is not ready for a full scale rollout of commercial services.

Will Internet Bypass Hurt Cable? Not Anytime Soon

Yesterday my colleagues at theStreet.com, Jim Cramer and Cody Willard wrote opposing opinions about the attractiveness of investing n cable stocks. I have been bullish on cable and Cramer even mentioned me as the lonely bull recently on his Mad Money show on CNBC. Cody is a good friend and we have debated this topic online and in person many times. In response to their comments, I wrote the following, which will appear on StreetInsight.com on October 25th. Unfortunately, Jim and Cody’s post are behind a firewall for paid subscribers only but I think you will understand my comments anyhow.

Jim Cramer had some bullish comments on AT&T (T) and Comcast (CMCSA/CMCSK) yesterday. Essentially, he argued that both companies are on a path for steady growth due to industry consolidation and a more benign pricing environment than expected.

On the other hand, Cody Willard says to sell cable because the internet and iTunes allow you to bypass cable altogether and watch and pay for just what you want. In other words, Cody believes the economic and pricing model of multichannel TV will breakdown.

For now, I agree with Jim. Cody may be right eventually but the time horizon where bypass is a real risk is many years down the line, well beyond what most investors should worry about.

As far as what matters now, I am with Cramer and this excerpt from my earnings coverage ofBellSouth (BLS) explains why....

The results from T and BLS indicate that the pricing environment in the battle with cable operators remains sanguine for all concerned. There is no doubt that the battle for subscribers is fierce but for now the battle is being fought on features, not price. Trends in average revenue per unit, especially for broadband, show that pricing has been stable this year. This is definitely better than most observers expected earlier this year.
How long the pricing remains benign will be the key to future performance of cable and telephone shares. I suspect that for the next several quarters all will be OK. T and VZ are benefiting from wireless growth and wireline cost cutting. These factors are overcoming the loss of access lines such that T and VZ can meet or beat their earnings growth targets. Additionally, penetration in high speed internet is still growing fast enough that DSL and cable can both achieve their subscriber goals without competing on price. BLS stated that its broadband subscriber growth is shifting in favor of higher speeds at higher price points. This is a strong indication that the broadband market is healthy enough to prevent a near-term price war.

Regarding Cody's bearish argument, I see several weak points, especially over the next year. To begin, most people that pay their cable or satellite bill are too lazy or not willing to go to the trouble of finding what they want on a variety of internet sites (ABC.com, CBS.com, NBC.com, etc.) and watching on their PC. As for iTunes, the interface and download process is a breeze but for now you are also watching on your PC or iPod. Watching TV is larger experience than just viewing the show. You want comfort and convenience. Right now, anything other than the living/family room TV and set top box meets neither need. Furthermore, there is no guarantee that the shows you will want to watch are available for download at iTunes or on the internet.

Cody says he wants to watch 100 hours per month of shows. How many different shows is he watching? When he cancels his cable he gives up 150 channels, how many of those is he watching to get his 100 hours? Entourage on HBO, 24 on Fox, Queer Eye on Bravo, etc. I like one show an Animal Planet and one on the History Channel and one on Versus and another on HGTV and a different one on Food Network. You get the idea. Guess what? Not all those shows are available for download. Guess again? You might have to pay individually for each of those shows if they aren’t streamed to the network’s website.

And then there is sports. No NFL games for Cody. Or NBA. Or college hoops. Or World Cup Soccer. Or Wimbledon and US Open tennis. Or the Masters. Or Yankees or Mets games. Maybe his beloved Lobos make the Final Four. No doubt he'll be paying a premium to see that game.

There is also value in the ability to channel surf and find shows accidentally. My daughter and I have found lots of great independent movies on IFC and Sundance. We were surfing the other night and came upon Ugly Betty, a new show that lots of our friends are talking about. I had a brief fling with Iron Chef, which I stumbled on while giving the remote a workout. Sure, I could just download or stream these shows but there is value is knowing they are part of the package in my monthly cable bill.

Either Cody watches the limited amount of content he can get for free by viewing an ad at one of the network websites (again, no guarantee the show he wants is available) or he goes to iTunes and downloads at $1.99 per show, probably more if sports ever goes to per event pricing. Let's say he finds half of his shows for free. That leaves 50 hours, maybe 35 shows for download or $70 per month. I don’t know about Cody but I get cable TV, high speed internet, and telephone for $111 per month from Comcast including all fees and taxes. Unbundling won't save many people much money and for now it is inconvenient. Media Center PCs and the upcoming iTV device from Apple Computer will improve the experience and eventually help to reduce the per show pricing. Those devices will also eventually help create enough demand that more shows will be available. For now, the value of my bundle of 150 channels is pretty good. And I think that goes for the overwhelming majority of couch potato households.

Cody has identified a risk but it is a risk that is miniscule now and will grow very slowly, likely not reaching critical mass in terms of financial performance and stock prices for many years. In the meantime, the story for T, CMCSA and the other cable and telephone companies will be whether the two industries continue to have enough growth opportunities that they don’t have to resort to a price war.

For the telephone companies, this means that DSL, data, and small and mid-size business revenues must continue to grow fast enough to offset continuing high levels of line losses, while cost cutting driven by merger synergies drives operating profit and cash flow growth. For cable, this means ongoing growth in telephony subscribers as part of triple play bundles where consumers buy more than the basic package.

Eventually, the battle for subscribers will focus on price. Broadband penetration will rise to levels where the absolute level of new subscribers won’t support the goals of the telephone and cable industries. Similarly, cable telephony will eventually steal more telephone subscribers than the telephone companies can offset through cost cutting and non-consumer revenues. And someday, though not in the next several years, telephone companies will have a widely deployed multichannel TV product. About that time, the bypass fears that Cody has discussed might be starting to bite as well.

I don’t see any of that occurring in 2007 so the coast is clear for continued strong relative performance from T, CMCSA, and the other major telephone and cable stocks.

Does The Cable Industry Require Another Hugely Expensive Network Upgrade?

I am surprised that cable stocks have held up since last Thursday’s Wall Street Journal article which indicated a recent report from Cable Labs, the industry’s internal R&D arm, said that to keep up with exploding broadband demand and Verizon’s fiber rebuild, the cable industry would have to complete another costly upgrade of its plant.

In the past, an article like this would have caused cable stocks to sell-off and brought out lots of “I told you so” comments from the numerous cable bears. The bear case on cable is that the industry will have to dramatically increase its capital expenditures to remain competitive with satellite and telephone companies, reducing return on investment and sucking up free cash flow that could be used to buyback shares, reduce debt, to otherwise reward shareholders.

The fact that the shares were firm in the face of the article shows how much the sentiment given several consecutive strong quarters from Comcast, Cablevision, and Time Warner Cable. I think investors have finally realized that over the next year or two, cable is likely to continue its strong financial and subscriber performance. Even if the article has merit, the issue raised is a long-term one that is not likely to get in the way of the fundamentals driving the group for another year or more.

The article stated that CableLabs believes that growing demand for broadband and increasing use of pipe clogging video means that cable’s current fiber/coaxial cable network will not be sufficient to meet consumer demands. Further, Verizon will leapfrog the cable plant as it’s fiber to the home build out is completed.....

Interestingly, executives from major cable companies were quoted in the article throwing cold water on the CableLabs report. That is not surprising given the stakes but the article does leave out a lot of angles including how much any rebuild might cost if it became necessary. Cable already runs fiber to most neighborhoods so to match Verizon it would need just need to run fiber for the last mile or less in most cases. It is highly doubtful that the cost to upgrade would be anywhere near the much discussed $60 billion upgrade the cable companies completed a few years back. It is that upgrade that put cable in the driver’s seat today, by the way. The article does mention that technology advances and upgrades and the possibility of recapturing analog channels could mitigate the need to upgrade.

My thesis all along on cable has been that the industry had a multiyear window of opportunity where it could produce double digit growth with stable capital spending and high free cash flow. At the same time, investors were way too pessimistic about the timing of the competitive threat from the RBOCs. The only things that have changed is that Comcast has rallied over 25% this year and several quarters of the window have passed. The risk-reward trade-off is not quite as good today as it was in late 2005 or early 2006 but upside remains, particularly in Comcast, which will see even high growth rates in the next 6 to 12 months.

More Cable and Satellite Companies Report

Yesterday saw earnings releases from Cablevision (CVC), Charter Communications (CHTR), and DirecTV (DTV) allowing investors to take a snapshot of the current competitive environment in multichannel TV.

I think these results along with earlier reports from Comcast and Time Warner support eh bull case for cable over the short-term. CVC continued its strong double digit growth and although subscriber metrics did not surprise to the upside as they have recently, the ability of the company to produce outstanding financial results shows that the triple play is not just a defensive strategic maneuver --- it is driving renewed growth for the cable industry. Even industry laggard CHTR showed a second consecutive quarter of accelerating results albeit with growth rate still in the single digits. But for CHTR this is a definite improvement.

On the other hand, DTV subscriber growth at DTV continues to decelerate as the company is without a triple play bundle. Slower sub growth is enhancing EBITDA in the short-term but eventually this benefit will soften. Management at DTV seems to understand its toughening competitive landscape and is continuing its focus on its most profitable customers which are the most likely targets for cable’s triple play.....

I still think there is plenty of upside at Comcast. Consider that CVC and TWX are over one year ahead of Comcast in the rollout of telephony. CVC and TWX are enjoying 15-18% growth as the bundle has matured in terms of penetration and profitability. Comcast just raised guidance to 13% growth. It is very plausible to draw a parallel between the 2006 growth rates for TWX and CVC and the potential growth rate for Comcast in 2007. If Comcast’s growth does pick up further, recent analysts targets around $40 look quite realistic.

Comcast Reports Another Good Quarter: Time For The Bears To Hibernate

Comcast (CMCSA/CMCSK) reported another strong quarter with most key financial and subscriber measures beating estimates. On top of similar strength in 1Q, management is raising guidance. Revenue growth in the cable division (well over 90% of the company) is going up to 10-11% from 9-10%. EBITDA growth is now projected "at least" 13% higher vs. prior expectations of 10-11% growth. Revenue generating units are now expected to grow 60%, or by 4.2 million, up form previous guidance of a 3.5 million gain. The higher RGU growth means more equipment in customer homes so capital spending guidance is also going up by about 10%. There is no change to guidance for conversion of 25-30% of EBITDA to free cash flow.

Overall, the strong quarter and increased guidance indicates that Comcast's offer of the triple play bundle is driving financial results. More importantly, the accelerating gains in revenue generating units is improving Comcast's position for the day (at least several years from now) when AT&T (T) and Verizon (VZ) are competitive with their own bundle on a broad geographic scale. In other words, the triple play is driving near-term growth in revenue, EBITDA, and free cash flow while also improving the company's long-term competitive position. That should lead to a better valuation shares whether you use EBITDA, free cash flow, or EPS. Consequently, I see Comcast shares continuing to move higher with a target in the upper $30s increasing realistic in 2006.....

For 2Q06, Comcast reported revenue growth of 11% vs. expectations for 9%. The top line surprise flowed through to EBITDA which rose 14% at the cable division well ahead of estimates for gains of 10-11%. Revenue generating units or the total of video, high speed data, and telephony services held (I take all three and consume 3 RGUs) rose by 61% vs. a year ago due to strong growth in all three areas. The rollout of telephony is the key driver and given that Comcast is still marketing to just a portion of its footprint these gains should hold at least through 2007.

In most telecom subscriber businesses, better than expected RGU growth would lead to lower EBITDA due to the expenses of adding new services. Comcast is managing to buck the trend and increase margins simulataneous with accelerating growth. This is due to excellent expense control and better than expected pricing. Yes, that's right despite all the fears about competition for TV, high speed internet, and telephony, pricing is holding up much better than expected. Maybe the bears will finally acknowledge the strength of Comcast's competitive position due to its superior network. That strength is not going away anytime soon.

I also think that the bears that were bashing Comcast as little as six months ago because the company was growing slower than other cable companies and not yet offering the triple play should realize that maybe the decision to slow the rollout of telephony until the network, the company, and the servicing infrastructure was ready for prime time was the right decision. I suspect that 8% expense growth vs. 11% revenue growth is at least partially the result of the strategy toward telephony.

There is one nugget for the bears to chew on in the quarter. Capital spending guidance is rising by about 10%, or $350 million. This is a direct result of higher RGU growth which means Comcast is buying more modems, digital set tops, and DVRs. Of course, the higher RGU growth is driving near-term EBITDA above expectations so it might be a good thing, especially considering the long-term benefits of locking up more customers ahead of the long-term competitive threat form T and VZ.

My math on this is as follows. Capital spending is going up by $350 million vs. an increase in EBITDA expectations of $200 million. This $150 million is buying an additional 700,000 RGUs. Looking at unit pricing, each RGU is worth about $45 per month. Therefore, the $150 million is buying close to $400 million in incremental revenues. At a margin of 40%, that is an extra $160 million in EBITDA making the payback on the investment just year. Seems like a smart move to me and maybe the bears should reconsider their view that rising capital spending at a near-term cost of free cash flow is a negative. Someday maybe, but not now when T and VZ pose no serious threat outside of a few isolated communities. Comcast uses a simpler explanation explaining that the extra capital spending produces a 30% after-tax levered return.

I don’t mean to be overly positive with this summary but at the beginning of 2006 everyone hated Comcast. The stock is now up over 30% this year. The lesson here is that sometimes you have to look beyond the short-term action in the stock and stick with your long-term fundamental analysis. Sometimes the stock price is wrong.

Cablevision Comes Through: Stick With Comcast

Cablevision (CVC) shares are up sharply after the company reported better than expected 4Q05 results and announced 2006 guidance for its cable division that is above current analyst estimates. As the conference call begins, CVC shares are up 5% and dragging Comcast (CMCSA/K), up over 1% along for the ride. Wall Street may hate cable stocks but with CVC in the books, the big three of CMCSA, Time Warner (TWX), and CVC have all reported double digit gains in EBITDA on improved basic subscriber growth, stable to higher ARPUs, and stronger than expected growth in new services including high speed data, telephony, and digital TV. With CMCSA and CVC trading under 7 times EBITDA, producing big free cash flow, and projecting another year of double digit growth, I continue to think the street is wrong and that cable stocks will offer decent returns in 2006.....

CVC reported a strong quarter. Cable revenue grew 16.1% with EBITDA growing 15.8%. Both of these figures slightly exceeded analyst estimates. Subscriber metrics were particularly strong. Basic subs rose by 17,000 ahead of estimates that ranged from 3,000 to 10,000. Digital TV, high speed data, and telephony subs each grew more than expected. Digital subs were up 119,000 against expectations for a mid-90,000 gain. High speed data subs grew 94,000 against expectations of 75,000. Telephony subs were up by 130,000, versus analyst estimates fro gains of 100,000 to 120,000. ARPU was strong at $100.46, the first time it has ever exceeded $100. Churn remained under control with management attributing the especially low churn among the growing base of triple play subscribers. This is having the impact of helping the closely watched basic subscriber growth.

Capital spending was slightly higher than expected at $189 million. Most analysts were closer to $175 million. Most of the excess was from customer premise equipment that came from the better than expected sub growth.

There is no sign that CVC growth is about to abruptly slow. Penetration of digital TV, high speed data, and telephony grew sequentially by 350 basis points, 200 basis points, and 290 basis points, respectively, from already industry leading levels. Competition from RBOCs, via low cost DSL and Verizon's fiber overbuild, so far seems to have no impact.

Guidance for 2006 implies another year of strong growth. Basic subs are projected up 2-2.5% with total revenue generating units up 1 million to 1.25 million. Analyst estimates assumed growth of less than 1% for basic subs and RGU gains of no more than 1 million. Revenue and EBITDA are both projected to rise in the mid-teens on flat capital spending. At one point earlier this year, analysts expected slightly lower capital spending in 2006 for CVC and the entire industry. Due to faster than expected subscriber gains, 2006 capital spending is now projected flat throughout the industry. This remains the key point of concern for investors. CVC management reiterated that there is no need to rebuild plant and capital spending is a function of new product growth.

The Rainbow national networks including AMC, Independent Film Channel, and Women's Entertainment enjoyed low single digit revenue growth in 4Q05. Growth in revenue and EBITDA is 2006 is projected in the high single digits. In response to a question management stated it was not looking to sell the networks. The street would like to see a sale.

The balance sheet is leveraged relative to CMCSA and TWX at 4.9 times debt to EBITDA. With an agreement in place for a new credit line, a special dividend is back on the table. Analysts estimate a $10 dividend, as previously planned, would raise leverage to 6 times. The sale of the Rainbow networks would likely be back on the table if the dividend comes to pass.

I think CVC shares are cheap. I also think CMCSA shares are cheap. CVC is the more aggressive play as growth is faster, leverage is higher, and management-shareholder conflicts exist. CVC also has takeover potential. I like cable stocks and think the street will eventually lift valuations in recognition of double digit EBTIDA growth, flat capital spending, and growing free cash flow. CVC's earnings report wraps up reporting season for the major market operators and supports the bull case.

Great Quarter From Comcast

Comcast (CMCSA/K) reported better than expected results. Across almost every important financial and subscriber metric, the results were at the high end of expectations or better than expected. This just the start of a string of good results tat will feature double digit top line growth, slightly expanding margins, leveraged EBITDA growth, and growing free cash flow. The market is finally coming around to my long held view that results will be good for a couple of years before the competitive challenges from RBOCs, internet bypass, and satellite companies impact financial and subscriber measures. If that is the case, the shares go up before they go down. That is what is happening now and I think there is more upside to the stock.

The key financial figures for Comcast are in its cable division which provides 95% of revenue. The quarter was better than expected even after expectations had strengthened in recent weeks. Revenues grew 10% and EBITDA grew 12%. Both were ahead of expectations for 8-10% growth. Capital spending was flat vs. a year ago so growth in EBITDA flowed through to cash flow from operations. This is exactly the financial model the street wants to see and the shares are rising accordingly today.

At the subscriber level the numbers were equally good. Basic subs reversed their recent negative growth as the company added 47,000 subscribers. This is higher than any published estimate I am aware of. Digital subs grew by 340,000, about 50,000 ahead of expectations. High speed subs grew by 437,000, about 70,000 ahead of expectations. VOIP telephony new subs came in at 211,000, slightly above expectations. Importantly, pricing held across all products as ARPUs at the product or household level were flat or higher against a year ago. Competition may be brutal but so far at least CMCSA's superior product offerings and bundling are easily holding their own...

I think there are a couple of things at work at the subscriber level. First, new video products like VOD, DVRs, and HD are gaining increasing traction. Second, the VOIP telephony rollout is broadening and beginning to have spillover benefits. Put these two things together and you have lower churn which raises net adds and helps pricing and margins.

These trends have been largely evident at Cablevision (CVC) and Time Warner (TWX) over the past year. Comcast's results have lagged a bit as they were behind n the VOIP rollout. The market has been refusing to pay for a potential acceleration at Comcast or the good results at CVC and TWX. Now that the industry leader has joined the party with actual results that support the bull case, CMCSA shares are responding.

Management maintained full year guidance despite the better than expected results. I think this is because it is early in the year and 2Q is seasonally weak. I think guidance goes up following 2Q results. Estimates will go up right away.

The shares are headed higher as the VOIP rollout expands and advanced TV services continue to attract customers. These trends will remaining place deep into 2007. CMCSA has another 10% upside at least over the next year.

Comcast Shares Finally Moving: Will Earnings Support The Move?

I remain bullish on CMCSA which reports before the open tomorrow. I think investors are slowly coming around to my thesis that financial performance over the next year or two will be quite strong and is worth paying for today. CMCSA will begin to show some aspects of subscriber and financial performance this quarter. But this will only be a prelude to accelerating growth later in 2006 as the impact of the broader rollout of the company's VOIP telephony produce begins to bite.

My only fear about tomorrow's results is that expectations have gone up a bit due to better performance for CMCSA shares in recent weeks. This has raised the bar for the stock's reaction even if the financial and subscriber results match expectations.....

For 1Q06, CMCSA is expected to report EPS of 15 cents, revenues of $5.82 billion, and consolidated EBITDA of $2.18 billion. Investors will be much more focused on the results of only the company's cable business. Expectations for key financial measures include revenues of $5.6 billion, EBITDA of $.2.17 billion, and capital expenditures of $850 million. Revenue and EBITDA growth will be near 8-9%, a prelude to growth in excess of 10% later this year and into 2007.

Almost as important as the financial figures will be subscriber counts. Analysts are looking for basic subscriber additions of around 25,000. These estimates have risen very recently as Charter, Insight, and Mediacom have each already announced better than expected results. Comcast did not dispute subscriber growth when it appeared at NCTA earlier this month. Positive basic subscriber is a reversal of recent trends and key to better sentiment on cable stocks. Cable is benefiting from bundled products, especially the addition of VOIP telephony.

Digital TV subscribers are expected to continue strong growth with a gain of close to 300,000 subscribers. High speed data subscribers are also expected to maintain their recent growth rate with the addition of 350,000 subscribers. Analysts are looking for 200,000 new VOIP Telephony subscribers offset by about 55,000 lost circuit switched telephony subscribers. Comcast will add north of 1 million telephone subs this year and even more in 2007.

While subscriber growth trends remain solid, so will trends in pricing. Despite investor fears, ARPU on the individual products will be quite stable. Overall, ARPU per customer will continue to rise, reaching $86 per month as more subscribers add additional services to their personal bundle.

Despite fears of a death mathc with the RBOCs and satellite companies, 2006 results for Comcast will look a lot like 2005 and 2004: close to double digit growth in revnues and EBITDA and high free cash flow production. As investrs growth more comfortable that double digit growth will continue through 2006 and into 2007, CMCSA shares will head into the low $30s. I think the move has started. I think tomorrow's results will help.

The Internet Won't Be Replacing Your Cable TV Anytime Soon

One of the blogs I read regularly belongs to Mark Cuban. In a post last week, Mark discusses his view that lack of capacity in the final mile to the home will limit the ability of consumers to bypass the traditional distributors of TV, cable and satellite companies, any time in the near future. Mark's article borrows heavily from research written by Sanford Bernstein analyst Craig Moffett and testimony that Craig gave before a Congressional Committee. I like the basic concept – the internet is not going to replace TV anytime soon. As I have repeated as nauseum since last summer, the near-term threat to cable EBITDA growth rates is being way overestimated leaving sentiment toward Comcast way too negative, and providing an opportunity for good profits as sentiment shifts to a more realistic view of the company's EBITDA and free cash flow growth over the next few years....

I guess it should have struck me when I was playing with the new Mac Mini Front Row software from Apple Computer (AAPL). Sure, I can hook up the Mini to my new flat panel HDTV and then from across the room I can use my Apple remote to launch iTunes, and watch any video I've downloaded. The question is how will I get enough video into iTunes to make me want to give up my cable (or satellite) TV subscription?

According to the work Moffett's work that Cuban quotes, Verizon will only reach 13% of US household with fiber in 2010. AT&T (T) might reach another 25% with a robust broadband product. That same research claims that to download a HD version of the 40 Year Old Virgin today on a typical DSL line would take 24 hours. So assuming you actually watch TV anywhere close to the typical American household, as of today, there is extremely limited network capability to download what you want to watch. Of course, there is virtually no first run TV content available anyhow.

I am not saying that Comcast is a five year gravy train. It might stop growing or be shrinking by then. I am saying that current sentiment bears little resemblance to the reality of the company's probable financial performance for the next few years. I think a couple of more quarters of double digit EBITDA growth and flat capital spending will shift the sentiment off extreme negative and provide 20% upside.

Wireless Telephony, Cable, and the AT&T - BellSouth Merger

One impact on the on the cable companies of the AT&T (T) - BellSouth (BLS) merger that I did mention in my previous post was wireless telephony.

As has been widely discussed, one of the driving forces behind the T-BLS merger is the consolidation of Cingular wireless with T and the rebranding of the service to AT&T. This is supposed to provide lots of cost synergies and possibly a boost to recently lagging subscriber growth at Cingular.

Right now, both the RBOCs and the cable companies have triple play bundles. However, the bundles differ. RBOCs offer wireline telephony, high speed data, and wireless telephony. Cable offers multichannel TV, high speed data, and wireline telephony via VOIP. RBOCs are headed into multichannel TV via fiber overbuilds and internet based technology but presently their TV offer is limited to joint ventures with the satellite players. Only Cablevision presently offers a wireless service via a reselling agreement with Sprint....

So while cable is missing wireless, RBOCs are missing TV. Both are deeply penetrated products with most American households receiving both services. Cable has talked for years about offering the quadruple play bundle that includes wireless. A decade ago there was an aborted deal with Sprint. For years after that cable decided it could do without wireless but that all changed in the past year culminating in a new JV with Sprint Nextel. Most of the major cable companies are either in the initial deal or have an opt-in. Each will self-brand but by entering a deal with Sprint en masse the technological challenges will be lessened as standardization can be attained from day one.

The cable JV is supposed to launch around mid-2006. However, recent press reports indicate this could slip until the 2H06. Most analysts have adopted a wait and see approach and are not assuming much, if anything, for wireless in their cable models. However, there are a couple of analysts that are quite bullish on the deal. The bullishness comes from the technology that Sprint and the cable companies claim they will deploy. Services to be offered will include control of your TV and your home network via your wireless phone and the ability for your wireless phone to function as a landline phone in and around your residence but act as a wireless phone when you are mobile. That would mean one number-one phone, something that presumably could be quite attractive to consumers.

I am not sure how the Sprint-cable JV will play out. However, as with my commentary yesterday, I see little impact in the next couple of years from the T-BLS merger on cable's business plan or operating results. In the case of wireless, RBOCs are the incumbent. Cable has the potential to gain share but it probably won’t be all that profitable unless it sucks in more high speed customers and keeps TV customers from considering RBOC alternatives – in other words churn goes down.

One thing the RBOCs won't have to fear is a heavily discounted wireless product from cable. Cable has not shown much willingness to discount any of its products so far. Unless the RBOC TV rollout proceeds much faster than I expect, I doubt wireless discounting will occur in the initial years of cable's quadruple play offering.

Does the AT&T-BellSouth Merger Hurt Comcast?

Some observations and thoughts related to cable and media on the AT&T (T) - BellSouth (BLS) merger after reading through all the stuff that my email inbox:

• I've been bullish on Comcast (CMCSA/K) using a thesis that the shares had room to rise as long as the window remained open for a year or two of double digit EBITDA growth, flat capital spending, and rising free cash flow. I had been assuming the window would be shut gradually as the RBOCs slowly rolled out their TV packages. My initial reaction to the merger is that the window may stay open a bit longer as T will be distracted for another year with regulatory issues but once the window beings to shut, it may do so more quickly. A couple of reasons for this view. First, BLS had not indicated it would be an aggressive player in launching multichannel TV and had shown little interest in T's faster to market IPTV approach. This may now change. Second, BLS has not been a discounter when it comes to DSL as T has been. This is also likely to change. Mix all this together and a decent working thesis seems to be a less aggressive T in the near-term but a more aggressive and larger T in the long-term.

There's lots more. Please click below.

• Cable will see the merger approval process as an opportunity to push for some favorable regulatory rulings. Specifically, cable will ask for a restriction on the granting of statewide franchises for RBOC multichannel TV. If granted, this would slow the TV rollout. Second, cable will ask for an increase in its ownership cap that restricts the number of subs any one operator can own. I don’t see that as a positive for CMCSA because the street will react negatively to large acquisitions at this point as investors want free cash flow returned to them. As far as potential acquisitions go, only Cablevision (CVC) is an obvious and large target but as Ray Katz eloquently put it today, CVC will sell when the Dolan's want to sell and not sooner so big acquisition opportunities don’t really exist for CMCSA or Time Warner (TWX).

• Another regulatory issue, network neutrality, is likely to get a lot of play during the approval process. My impression thus far is that it is VZ and T that have been the bad guys on network neutrality while cable has stated it is not interested in breaking neutrality. The regulatory process could enforce network neutrality but the anti-RBOC sentiment during the debate could modestly help the public image of cable. Cable is in a win-win on this issue as long as it stays in the background. It could reap the benefit, of which I doubt there is much, of lost neutrality if the RBOCs win the fight but not get tarnished in the battle with regulators. It sure would be a nice change if cable actually got a boost to its image.

• Cable may accelerate its shift towards an all-digital network. This will raise fears of another leg up in capital spending. Consequently, I see this as the potentially the most negative impact of the T-BLS merger on cable stock valuations. Of course, an all-digital network has competitive and financial advantages for cable beyond the capital spending so an acceleration in the transition might help the long-term investment case.

• Cable will push harder, if that is possible, to lock up VOIP telephony subs. The churn reduction of triple play households is real. The more telephony subs added before the merged company is competing full throttle, the more defensible cable's competitive position. This could lead to more aggressive pricing for bundles in the short-term or higher capital spending driven by spending on customer equipment. Both might be viewed negatively in the short-term by investors.

• Lots of discussion of the fact that T uses Echostar (DISH) for satellite TV while BLS uses DirecTV (DTV). Conventional wisdom has quickly formed that DISH is the winner because BLS is likely to drop DTV in favor of DISH. This is logical but for DISH shares the long standing rumors of a T takeout of DISH are down the drain for at least the rest of 2006. Furthermore, with the enlarged footprint, it seems to me that when T gets aggressive with its IPTV rollout, the satellite option will quickly become marginalized.

• BLS is getting taken out at about 6.9 times 2006 estimated EBITDA, a premium to CMCSA. Analysts currently forecast a negative low single digit long-term revenue growth rate for BLS and a positive long-term low single digit EBITDA growth rate. Both growth rates comfortably trail assumptions about long-term growth at CMCSA, so on this comparison, CMCSA looks cheap. On the other hand, Verizon (VZ), T, Qwest (Q), and Sprint Nextel (S) all trade between 5 and 6 times 2006 estimated EBITDA so CMCSA looks appropriately valued at a premium to the survivor group of RBOCs.

• T and BLS have a combined advertising spend of about $3 billion, according to Merrill Lynch analyst Lauren Fine. Given the negative impact of prior mergers of major advertisers in telecom and retailing, this is another blow to ad-supported media stocks. On a combined basis, newspapers appear most at risk as both T and BLS spend heavily in that arena, although T proportionately at a much lower rate relative to its revenues. Network and spot TV have the next biggest share of the merged company's ad spend but most of this spending is by T. In fact, what struck me from Lauren's data is how little BLS relied on national advertising platforms like TV. On the flip side, BLS used a lot of radio while T sued little. This local focus makes sense given BLS's narrow regional footprint and lack of enterprise exposure. Consequently, the risks to traditional media from the merger probably are focused on specific newspapers and radio stations in the BLS geography.

In summary, I find surprisingly little investment impact on cable and media from the T-BLS merger. If you buy my bull case on CMCSA, I don’t see that your opinion would wobble much. If you are a bear on cable, you got some new ammunition. The implications for ad-supported media companies are much less and probably will get little attention from Wall Street. Seems like an awful lot analysis today for just a little action in the media stocks.

Strong Quarter At Cablevision Could Boost Cable Stocks

Cablevision (CVC) shares are up sharply after the company reported better than expected 4Q05 results and announced 2006 guidance for its cable division that is above current analyst estimates. As the conference call begins, CVC shares are up 5% and dragging Comcast (CMCSA/K), up over 1% along for the ride. Wall Street may hate cable stocks but with CVC in the books, the big three of CMCSA, Time Warner (TWX), and CVC have all reported double digit gains in EBITDA on improved basic subscriber growth, stable to higher ARPUs, and stronger than expected growth in new services including high speed data, telephony, and digital TV. With CMCSA and CVC trading under 7 times EBITDA, producing big free cash flow, and projecting another year of double digit growth, I continue to think the street is wrong and that cable stocks will offer decent returns in 2006....

CVC reported a strong quarter. Cable revenue grew 16.1% with EBITDA growing 15.8%. Both of these figures slightly exceeded analyst estimates. Subscriber metrics were particularly strong. Basic subs rose by 17,000 ahead of estimates that ranged from 3,000 to 10,000. Digital TV, high speed data, and telephony subs each grew more than expected. Digital subs were up 119,000 against expectations for a mid-90,000 gain. High speed data subs grew 94,000 against expectations of 75,000. Telephony subs were up by 130,000, versus analyst estimates fro gains of 100,000 to 120,000. ARPU was strong at $100.46, the first time it has ever exceeded $100. Churn remained under control with management attributing the especially low churn among the growing base of triple play subscribers. This is having the impact of helping the closely watched basic subscriber growth.

Capital spending was slightly higher than expected at $189 million. Most analysts were closer to $175 million. Most of the excess was from customer premise equipment that came from the better than expected sub growth.

There is no sign that CVC growth is about to abruptly slow. Penetration of digital TV, high speed data, and telephony grew sequentially by 350 basis points, 200 basis points, and 290 basis points, respectively, from already industry leading levels. Competition from RBOCs, via low cost DSL and Verizon's fiber overbuild, so far seems to have no impact.

Guidance for 2006 implies another year of strong growth. Basic subs are projected up 2-2.5% with total revenue generating units up 1 million to 1.25 million. Analyst estimates assumed growth of less than 1% for basic subs and RGU gains of no more than 1 million. Revenue and EBITDA are both projected to rise in the mid-teens on flat capital spending. At one point earlier this year, analysts expected slightly lower capital spending in 2006 for CVC and the entire industry. Due to faster than expected subscriber gains, 2006 capital spending is now projected flat throughout the industry. This remains the key point of concern for investors. CVC management reiterated that there is no need to rebuild plant and capital spending is a function of new product growth.

The Rainbow national networks including AMC, Independent Film Channel, and Women's Entertainment enjoyed low single digit revenue growth in 4Q05. Growth in revenue and EBITDA is 2006 is projected in the high single digits. In response to a question management stated it was not looking to sell the networks. The street would like to see a sale.

The balance sheet is leveraged relative to CMCSA and TWX at 4.9 times debt to EBITDA. With an agreement in place for a new credit line, a special dividend is back on the table. Analysts estimate a $10 dividend, as previously planned, would raise leverage to 6 times. The sale of the Rainbow networks would likely be back on the table if the dividend comes to pass.

I think CVC shares are cheap. I also think CMCSA shares are cheap. CVC is the more aggressive play as growth is faster, leverage is higher, and management-shareholder conflicts exist. CVC also has takeover potential. I like cable stocks and think the street will eventually lift valuations in recognition of double digit EBTIDA growth, flat capital spending, and growing free cash flow. CVC's earnings report wraps up reporting season for the major market operators and supports the bull case.

Comcast: Not Good Enough But I'd Hold On

Comcast (CMCSA/K) reported 4Q05 earnings that were pretty much inline across all metrics. Revenue exactly hit estimates, EBITDA might be considered light but that is certainly not the case if hurricane losses of $48 million due to the loss of 20,000 subscribers are considered. Subscriber additions were on target with basic subs growing 40,000 (60,00 ex-hurricane losses), data subs growing slightly above expectations and digital TV subs growing as expected. ARPUs were stable to higher across the board as expected.

Despite a generally inline report, CMCSA shares will trade lower due to confusing 2006 EBITDA guidance that in the headline EBITDA number is probably considered light. CMCSA project revenue growth of 9-10% in 2006, as expected. However, EBITDA growth of 10-11% is below expectations by 100-200 basis points. Management explained at length that the broad rollout of VOIP and investments in content assets would each cost 100 basis points in growth next year. A major new product push like VOIP brings forward customer acquisition costs thus negating year one cash flow from the new subscribers. If you buy that argument and assume analysts had not factored the lag into 2006 estimates then guidance is fine. Based on numerous questions on the call, this is clearly the issue facing the shares today. The questions also suggest that analysts had not considered these factors....

One good question about the VOIP rollout was "given the enlarged footprint it seems that your 1 million sub growth in 2006 could be low, if so can we assume that you could beat the sub guidance without penalizing EBITDA?" Management didn't really answer yes or no but if this turns out to be the case that would be a bulish development.

Something else that arises out of VOIP growth drag in 2006 is what abut 2007 and will there be a payoff? Management addressed this confidently and while they would not provide 2007 EBITDA guidance they did imply they expected EBITDA growth to accelerate in 2007 vs. 2006. This is good news but given that the RBOCs will have another year to rollout video and DBS may find a broadband product, investors will be unwilling to pay for 2007 growth. So the bottom line off this quarter is that the hoped for acceleration in EBITDA growth that is necessary to attract momentum and growth investors will not occur in 2006.

While this will make it tough going for CMCSA shares in the near-term, investors should not lose site of the fact the company is consistently growing its top line at close to 10% and producing operating cash flow growth above that level as margins expand. Free cash flow of $2.5 billion is at least stable in 2006 and should grow in 2007. This is a pretty good financial profile for such a large company and to me it is worthy of an EBITDA multiple above the current 6.5 to 7 times 2006 estimates.

Typing that made me realize that many of the issues that are holding back CMCSA shares are due to "bigness." This is a giant company which means that rolling out VOIP Telephony across the entire country leads to operational and financial challenges. IT is still the right thing to do but the period of actual rollout increases expenses relative to the cash flow payoff. Similarly, to make Content meaningful tot a company this size requires substantial investment. Again, near-term it restricts the growth rate but it is still the right thing to do.

Wall Street wants near-term results. In the case of CMCSA that means a pickup in the growth rate. CMCSA seems to be managing for stable growth rates but to insure that the growth rate is sustained as far into the future as possible. I think that is the right move. I'd rather have 5 years of 10% growth than one year at 14% followed by a slowdown to single digits. This situation likely means CMCSA shares will remain frustrating. Yet, they are also cheap and offer good growth and free cash flow. I plan to stick around as that fits my profile as an investor.

Comcast Earnings Preview

Comcast (CMCSA/K) reports before the open on Thursday. So far in 2006, CMCSA has risen 7.5%. I think this sets up a big move in the stock off the earnings report as investors will either be disappointed and willing to lock in this year's gains or they will be happy and build on the gains. I am in the bull camp.

Expectations for the quarter call for revenue of $5.72 billion and EBITDA of $2.19 billion. All but about $250 million in revenue and $50 million in EBITDA will come form the company's cable operations with content providing the balance. While the NHL contract could provide negative volatility in the overall results, it will be growth rtes and metrics within cable that determine how the Street reacts to the results.....

Most street estimates call for revenue growth in cable of about 10% and EBITDA growth of 11-13%. Maybe just as important will be subscriber growth numbers and ARPU. Basic subs fell 46,000 last quarter which ignited the selling that pushed the stock steadily lower through the end of 2005. Analysts are expecting a return to positive sub growth in 4Q05 with estimates ranging form 30,000 to 70,000. Estimates for high speed data subs are tightly bunched at 360,000 net adds. The range of estimates for digital TV adds is larger, falling between 254,000 and 360,000. In late December, management announced VOIP telephony additions which indicated a sharp pickup in the weekly add rate, so telephony in 4Q won’t be a surprise.

Telephony in 2006 is key, however. The current run rate implies 750,000 to 1 million net additions for VOIP. However, VOIP is currently being offered in only about half of the company's footprint, so some analysts are speculating that the company could raise its 1 million net add guidance. I think the company will play it safe and maintain guidance but upside exists. It will probalby be like the HSD rollout where for two years, Comcast consistently raised the net add guidance.

There are a couple of other things to keep an eye on during the report and conference call. First, ARPU trends in 4Q05 should remain firm. Despite all the concern aobut competition, ARPU in video and data has been very firm throughout 2005. I don’t expect that to change in 4Q or in 2006. On the video side, everyone is raising prices, with the largest increases appearing on introductory packages. RBOC entry in scale is still down the road so this could be a source of positive surprise in 2006. On data, despite some aggressive promotional pricing by RBOCs and Comcast, ARPU has actually been stable this year. I also expect this trend to continue although Comcast will continue to cede market share to keep its ARPU up. I think this is a good business decision and is another source of positive surprise for 2006.

Second, pay attention for announcements on share repurchase. Comcast announced and probably completed a $2 billion buyback in 2005. Will the company be more aggressive in 2006? I hope so and if they do get more aggressive, the Street will be happy.

One thing that could get in the way though would be an unexpected hike in capital spending. 2005 saw capital spending come in at $3.5 billion, some $500 million ahead of initial expectations. This is probably the main reason why the stock performed so poorly since last summer. Any signal that spending will rise again in 2006 will be punished by investors.

More Price Increases From Cable Competitors

Back at year end I came across a research report noting that Dish Network and Comcast were both raising pricies across their entire spectrum of video offerings with the largest percentage increases occurring on introductory level packages. This struck me as out of sync with the very bearish sentiment on the Street concerning the competitive environment in multichannel TV. I recognize that the bigger concern surrounds the entry of the RBOCs into the TV business, but nevertheless, it does seem that if satellite and cable management's were deeply concerned they wouldn’t be raising the price umbrella further just ahead of a significant new entrant. I suppose you could read it as "let's milk our customers as much as we can before it's too late" but I am not that cynical. Maybe I should be?

I bring this up because DirecTV announced its own price increases last Friday and they were similar to the plans put out by DISH and CMCSA in that prices increase the most for low priced packages. One twist though is that DirecTV is raising prices less for existing customers than on the packages for new customers. This implies customer retention is part of their strategy and that is something the company has talked about since being taken over by News Corporation.

I guess something else to consider is that there aren’t many truly new subscribers with multichannel subscribers representing around 90% of total TV households. In that case, since everyone raises prices the competitive dynamic among current entrants is not altered all that much. Satellite uses lower pricing and aggressive equipment subsidies and cable uses the bundle of video, data, and telephony.

It still seems like the incumbents are just raising the pricing umbrella under which the RBOCs can slide; something they wouldn’t be doing if they feared the RBOC entry. I guess since RBOC entry will be gradual by community, the incumbents feel they can respond to those threats in just those markets while milking the customers in non-RBOC markets as long as possible.

Even after writing all that, I can’t get over the fact that ARPU trends in TV and data have been remarkably stable, in fact rising, over the past year. This clearly suggests that at least for now the greatly feared competitive environment is not as bad as the Street thinks. This should provide comfort to cable and satellite longs because it supports another year of double digit cash flow growth while the stocks sit at all-time low valuations, fully 40% below levels of a couple of years ago. In the meantime, balance sheets are strong and free cash flow is enormous. Still seems like a disconnect to me and Comcast is the best way to play it.

The Fiber Threat to Cable

Last week, a fellow contributor to Street Insight, Jeff Bagley, noted via his personal experience how powerful Verizon's all fiber strategy will be in the competition for broadband subscribers. I can’t really argue with his opinion but I do think that for the time being that news is deeply discounted in Comcast (CMCSA/CMCSK) shares. For that reason, I remain on the other side of the trade from Jeff as a CMCSA long. My thesis remains that the valuation of CMCSA will rise this year as the company gains benefits in cash flow growth, subscriber growth, and churn from its rollout of VOIP telephony. As this occurs I think the street's concerns about the long-term challenge from RBOC fiber will temporarily recede. I take it as a good sign that after closing at a 52 week low on December 30th, CMCSA shares have rallied steadily and significantly this year, rising 8.7% so far. If CMCSA comes through with solid 4Q05 earnings and provides comforting guidance when it reports I think the gains will continue with the stock ultimately reaching its summer of 2005 highs around $32.

One thing that may have helped the shares recently is a receding threat from a la carte (here and here). Earlier this week, the Senate Commerce Committee held hearings on this issue and according to Blair Levin at Stifel Nicholaus, Senators indicated that for the next few months at least legislation was off the table. The Senators seemed appeased by the introduction of family tiers by leading cable companies in December. However, Blair noted that they also indicated that if the new tiers prove unpopular the legislative option would reemerge. I suspect the they will prove unpopular so I do not expect this issue to go away forever, but for now at least there is one less thing for cable longs or potential longs to be concerned about.

Continuing the Discussion of Cable Stocks

In response to my latest post on a la carte subscriptions in the cable industry, Rob Martorana, a colleague at StreetInsight.com, emailed me the following comment:

On a completely different note, isn't "on-demand" programming the ultimate form of a-la-carte pricing? And what happens when individual shows are available for $0.99 for one-time viewing? For those of us who don't record everything on TiVo, I would love to be able to browse through the libraries of some channels. In fact, I think their inventory is worth more on an a-la-carte basis than it is via the current cable TV model. It sure would be convenient to pick and choose among all of the old broadcasts of Saturday Night Live, The Twilight Zone, King of Queens, etc. It would be fun to have all of this at my fingertips without having to buy a bunch of DVDs.

Perhaps this is where we are ultimately heading, since convenience adds value to any content. This would turn current economic model upside down. All of the value would accrue to the creators of content, while the distributor is reduced to a "dumb pipe". This has already happened with the Internet distribution of content such as Real Money and Street Insight and other subscription services. It will eventually happen to TV and film, too, because this is what consumers want and I believe they will pay for it.

For my thoughts on Rob's comments, please follow the "Continue reading" link....

In general, I'd agree with Rob's comments. I think the recent deals to distribute TV content over iPods and other deals between cable and satellite companies and content providers are a signal that both industries see that technology is enabling "on demand" programming. These deals are all about getting out in front of the trend so that both content producers and distributors can gain maximum economic value out of the transition. The video industries have learned something from the experience of the music industry, and management's deserve credit for at least making an attempt.

The ultimate outcome is hard to predict as are winners and losers. Like Rob, I see the most value coming from content creators. However, I fear the technological advances driven by broadband will serve to depress the overall profit pie that is available to be split among the interested parties. I think this I partially what is happening to the newspaper industry as pricing collapses for classified and help wanted advertising when it shifts online.

I don’t think all is lost for distributors either. Look at iTunes. Apple Computer (AAPL) is gaining economic value as a distributor, even if most of the value comes through sale of hardware. A similar situation could occur for distributors like Comcast (CMCSK/A) or DirecTV (DTV) if they can be the gateway for downloading video. I am not that optimistic that current gateways will hold in the face of broadband internet but I do think that TV habits among American viewers are deeply engrained and the transition to on demand viewing will be slower than currently feared. I also think that these fears are incorporated into current historically low valuations for the stocks of distributors.

This is pretty much where I am trying to get mentally throughout all of media. Accept the negatives, accept the challenges, but remember that these are now accepted "facts" among investors. I take comfort from the fact that virtually all media stocks are trading near historically low multiples. I still don’t see the catalysts to get the stocks moving but I don’t care about catching the absolutely perfect buy price either. So I'll wait, watch, comment, and keep my media investments spread among the old -- Disney (DIS) – the new -- Yahoo! and the obscure -- Central European Media Enterprises (CETV).

Cable Stocks Still Require Patience

I still like Comcast (CMCSA/K) and as I pointed out in the previous post the key to getting Time Warner (TWX) to close its valuation gap is an improved multiple for its cable division. This week has seen a few new developments on the cable scene but nothing that seems likely to boost multiples in the immediate future. I am beginning to think that approval of the Adelphia takeover and any conditions placed on the approval are the next significant catalyst for the group....

On Monday, Texas Utilities (TXU) announced it was teaming with leading broadband over power lines (BPL) player CURRENT Communications to roll out broadband services across 2 million homes in TXU's Dallas-Ft. Worth service area. BPL works and has tens of thousands of subscribers around the country. CURRENT has had success in Cincinnati. I question the potential for success of a standalone broadband product when bundles are being offered by the cable and telephony industries but BPL is real and this news just serves as a further depressant to cable multiples.

Also on Monday, TWX announced it would offer a family friendly tier to its subscribers. The tier would include 15 channels and would be offered on top of the basic cable package required by law with about a dozen channels including broadcast stations, public access, and a very limited cable number of traditional cable networks. Among channels to be included in the family tier are the Disney Channel, Discovery Kids, the Food Network, and Headline News. ESPN and Nickelodeon would not be included and neither would CNN or Fox News. According to a spokesman, TWX basically is going with true G-rated channels.

The family tier is to be priced at $13 per month which would be in addition to $12 per month for basic cable and $5 to $8 to rent a digital cable box that is required to make tiering possible. Thus, a household desiring the family tier would receive about 27 channels at a cost of a little over $30 per month. Presently, expanded basic includes 60 or more channels for about $45 per month. Digital tiers can bring the channel offerings to well over 100 for another $10 to $20 per month before considering Pay TV networks like HBO.

While TWX's offering was immediately criticized by the indecency lobby, I think it will be enough to sway the FCC and Congress and avoid true a la carte via legislation. Approval of the Adelphia transaction with the family tier concept explicitly cited should end this issue for the cable industry for the at least the next several years.

Despite my optimism, the cable industry is still fighting the public relations battle against a la carte. The latest salvo is a study by media consulting firm < a href="http://adage.com/news.cms?newsId=47231>"Kagan Research that concludes a la carte will hurt consumers though less choice and higher prices. Kagan does some excellent work but I would not consider them an objective party in this dispute. Nevertheless, I agree with their conclusion that current analysis suggesting a la carte would save consumers money is flawed as it largely ignores the economics of the cable networks business. Specifically, the analysis ignores the dramatic increase in expenses that channels would incur to market themselves and fails to consider how per subscriber prices charged to cable companies would have to rise massively to offset lost affiliate fees and advertising revenue. Kagan concludes that consumers might have to opt for as few as nine channels to save money. I don’t know if that is true but I would again point out that HBO charges on average over $10 per month. To me, this implies that quality networks currently offered on expanded basic would have to charge at least several dollars per month and ESPN with all of its exclusive live sports programming would be as expensive as HBO.

So this week sees one win and one loss for cable. Adelphia could be wrapped up in six months or less and 4Q results for the cable industry should be solid. I think that is a recipe that means investors should show patience with cable stocks.

Is A La Carte Pricing Coming To Cable?

The big news this week in media is the announcement that the FCC appears to have changed its mind and is now supporting requiring the cable TV industry to offer a la carte programming. A la carte means that subscribers could chose whatever channels they want to come into their house and pay only for those channels. So, you might pay $2.50 for ESPN, 20 cents for Lifetime, 35 cents for CNN, etc. In theory, this would save consumers money because studies show that most consumers only watch about 17 of the more than 50 channels that are included in the typical expanded basic cable package. It would also allow consumers to opt of channels that carry so-called indecent programming that now are included in standard cable TV packages. MTV, Spike, Comedy Central, and FX are networks often cited for indecent programming....

Media stocks sold off on this news and analysts were most concerned that cable networks stand to lose a lot if a la carte pricing were brought to multichannel TV (as opposed to cable companies like Comcast who would also be hurt but are not the focus of this commentary). Cable networks have two revenue streams: subscriber fees and advertising. The question is how much those two streams are linked. ESPN gets $2.50 per subscription per month from the cable and satellite companies, which pass this cost right through to their subscribers. A broadly distributed and popular network like HGTV might get 25 or 35 cents per subscription, while a niche network like Fine Living might get just 5 cents to 10 cents per subscription. At well-established and broadly distributed networks, advertising revenue is much larger than subscription revenue, as it is for newspaper or magazine companies (except ESPN where the high subscription fees are meant to underwrite the cost of expensive sports programming like the NFL). Another datapoint that fits into this debate is HBO: The most broadly subscribed a la carte network has 28 million subscribers who pay an average of about $10 per month. There are just short of 90 million multichannel TV households in the U.S, out of a total of close to 110 million TV households.

Those in favor of a la carte pricing will say that ratings on small, niche networks like Oxygen or the Game Show Channel will be easily replicated as the core audience for those networks will opt in and buy the network. Thus, the number of eyeballs will stay the same, and advertising revenue will be maintained. One could even argue that advertisers will pay a higher cost per thousand viewers if they know that they are reaching interested and motivated potential consumers. In fact, these networks could probably charge a higher monthly subscription fee since they will be demanded by their viewers. This is a sort of a "cost per click" model, I guess.

On the other hand, the networks will argue that the mere fact that the entire universe of viewers can stumble upon their channel increases viewership beyond the core audience. These incremental viewers can be monetized via greater advertising dollars at the same cost per thousand viewers. Further, networks will argue that the cost to develop or acquire programming is very high, and without the potential to increase ratings via the easy sampling that can be obtained with broad distribution across all multichannel households, there is no incentive to invest in new programming. Networks will also argue that independent networks will have no way to make potential viewers aware of their channel and gain sampling at an economical cost, so they will be no better off in an a la carte environment. Finally, the networks will argue that they will have to dramatically raise the current subscription prices to offset the cost of higher marketing expenses to attract subscribers and to offset whatever decline in advertising occurs (think about HBO now which charges $10 per month with no advertising and is generally thought to be as profitable as a traditional cable network like MTV).

There are a lot of other issues for a la carte as well. Can the cable and satellite companies offer it without spending hundreds of millions or billions on new technology upgrades to their networks? What happens to multiyear contracts for the carriage of current networks? What happens when a network like ESPN has a carriage agreement that requires the cable or satellite company to also offer a niche channel like ESPNU that otherwise would not be bought by consumers?

In the end, I believe that a shift to a la carte is just too disruptive to the current TV model for all concerned (viewers, programmers, and distributors) to suddenly be forced via Congressional fiat. What is really going on here is a power play by the indecency lobby, which is largely Republican and knows that it has friends in control of all three branches of government. Commissioner Martin is probably just making a play, hoping to force the cable and satellite companies to offer broad programming packages that exclude the channels that attract the most attention on indecency (i.e., Comedy Central, MTV, Spike and FX). If Congress actually moves toward passing a la carte legislation, I suspect that multichannel TV distributors will quickly offer these family friendly packages.

Comcast: Disappointing Quarter Delays Potential Upside

Elements of Comcast's 3Q05 earnings report are disappointing and they are elements that will matter to the Street. While top line revenue growth and EBITDA growth closely tracked Street estimates, rising 10% and 14%, respectively, a loss of 37,000 basic subscribers in a seasonally strong quarter and higher than expected capital spending, and thus lower free cash flow, will be the key takeaways from the quarter. These facts caused Comcast to decline more than 5% yesterday....

Comcast lowered its 2005 corporate EBITDA growth rate guidance but that is due to the NHL contract at OLN and should not be of concern to analysts. There is no change to revenue or EBITDA at the cable division, which represents over 90% of corporate revenue. However, Comcast did raise its capital spending guidance for 2005 by $200-300 million which leads to a reduction in corporate free cash flow growth guidance from 35% to 30%. Higher capital spending is attributed to greater than expected spending for the Comcast Digital Voice (CDV) telephony initiative which is about to ramp up and higher take rates for high end set top boxes. Management notes that 80% of current capital spending is success based and variable so they are not as concerned about the increased spending as the Street will be. Comcast wants to add customers to its new services including high speed data, digital TV, DVR's, high definition TV, and CDV. Management is comfortable it can continue double digit EBITDA growth based on these services even if basic video subscribers are not growing or declining very slightly.

Unfortunately, this quarter will serve to feed the bear case on Comcast. Bears will say that double digit growth is sure to slow if basic subscribers stagnate or decline and that as the RBOCs start to offer video, basic sub declines may accelerate and growth in news services will slow. It is hard to argue with this thesis other than for the company to continue to kick out double digit growth quarter after quarter. I think that will occur, especially since Comcast is matching growth at Cablevision and Time Warner Cable without the churn reduction and growth benefits of VOIP telephony. In 4Q, Comcast guidance calls for the addition of over 200,000 VOIP subs in the CDV initiative. I think that will be a positive catalyst for shares that are awfully cheap at less than 7 times 2006 estimated EBITDA. Free cash flow of $2.5 to $3 billion a year and underleveraged balance are also ongoing positives to a bullish investment thesis for Comcast.

I would not be a seller on this morning's weakness but I suspect that a significant rebound or attainment of my low to mid-$30s target is not going to happen within the next few weeks.