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September 20, 2007

Mea Culpa on Comcast

Mea culpa. Comcast made a new low for this latest down move yesterday, falling more than 3% on what looks like its highest volume day ever before recovering slightly to lose 2.7%. This action occurred after the stock rose a whopping 11 cents in Tuesday's 335 point advance in the Dow. I feel your pain. As with all the individual stock and ETFs held in client accounts, I am long the stock in my own account.

The latest downdraft came after Comcast present at two Wall Street conferences over the last few days. This is secondhand but I am told that management was quite subdued in both presentations. They did not deny that recent hints they had provided that estimates for basic and broadband subscriber growth had to come down were real. The odds of a loss in basic subscribers in the seasonally strong 3Q now appear to be high....

If there is one thing besides higher capital spending that cable investors hate it is the loss of basic subscribers. If subs are leaving it means either that the competitive environment is such that eventually pricing will have to be used as a weapon and/or that capital spending must go up to improve the company's competitive position. Either outcome hurts free cash flow which is the ultimate value metric for this defensive, growing, underleveraged but capital intensive industry. In the current case, the flames are being whipped by positive comments from DirecTV about future sub growth and market share gains.

I can only hope that the bar has now been lowered ahead of 3Q earnings so that the actual results are greeted with relief. Alternatively, maybe management is being overly cautious after having been burned on 1Q and 2Q results following comments like the business is "on fire." Finally, I'd ask that you put this is perspective. If Comcast loses 50,000 basic cable subs this quarter, that works out to a whopping $15 million in lost revenue assuming systemwide average revenue per sub. Comcast has 24 million basic cable subscribers and is expected to generate $7.8 billion in revenue in 3Q. Yeah, I know multiple contraction because of the long-term implications and lower out year numbers in analyst DCF models. But we are talking a loss of $14 billion in market cap since mid-July. I'll take more of the value trap risk for now.

Posted by Steve Birenberg at September 20, 2007 01:09 PM in Comcast