ComCastrophe
Q3 Results at No. 1 Operator Send Cable Stocks Tumbling
By Mike Farrell -- Multichannel News, 10/28/2007 8:00:00 PM
Comcast’s mixed third-quarter results touched off a sell-off that dispatched four of the six publicly traded cable stocks — including its own — to new 52-week lows.
Shares of the nation’s largest cable-system operator were hit hard early on, dipping as low as $20.82 each last Thursday — its lowest point in five years — before rising slightly to $21.28 per share. That left shares down $2.57 each or nearly 11%. Time Warner Cable — which is scheduled to release earnings on Nov. 7 and has had problems integrating systems acquired from Adelphia Communications last year (see Finance, page 45) — fell to $29.25 per share, another 52-week low. Shares closed the day down 8.5% ($2.61 each) to $29.40 per share.
Time Warner Inc., which owns 84% of TWC, also hit a 52-week low on the day, dipping to $17.60 per share before rebounding later in the day to close at $17.71 (down 65 cents each, or 3.5%). Mediacom Communications was the last cable operator to reach a new 52-week low ($5.57 per share) and closed at $5.70 each, down 38 cents or 6.25% for the day.
The downturn started shortly after Comcast reported its earnings Thursday morning, revealing it had lost 65,000 basic customers in the period, an improvement over second-quarter losses of 95,000 basic customers, but far short of the 11,000 additions in the third quarter of last year.
| CABLE DROP: The Stock Sell-Off | |||
|---|---|---|---|
| Comcast’s third-quarter results spooked cable-sector investors: | |||
| Share Price | Change | ||
| 10/24/07 | 10/25/07 | ||
| SOURCE: Nasdaq Web site |
|||
| Charter Communications | $2.55 | $1.97 | -22.8% |
| Comcast | $23.85 | $21.28 -10.8% | |
| Time Warner Cable | $32.01 | $29.40 -8.5% | |
| Mediacom Communications | $6.08 | $5.70 -6.25% | |
| Cablevision | $30.82 | $29.40 -4.6% | |
| Time Warner Inc. | $18.36 | $17.71 -3.5% | |
DIGITAL SLOWDOWN
Digital video additions, at 489,000, fell short of the 559,000 added in the same period in 2006.
High-speed Internet service also showed signs of slowing down. Comcast added 450,000 cable-modem customers in the period, versus 538,000 in the same period last year.
Digital-phone growth was the bright spot — Comcast added 662,000 customers in the period, compared to 486,000 in the same quarter last year.
Wall Street analysts weren’t expecting much. Several, including Pali Research media pundit Richard Greenfield, had already reduced their forecasts for the sector prior to Comcast’s third-quarter earnings release. But the stock watchers got even less than they expected. That, coupled with fears of the rising competitive threat from telephone companies, sent investors for the exits.
“Clearly, they [Comcast] disappointed already lowered expectations from us and others,” Greenfield said in an interview. “I think the question is, how much confidence do people have going forward? Clearly the stocks today [Oct. 25] are showing that people’s confidence level is ticking down substantially.”
Other stocks in the sector may not have hit new lows but didn’t fare much better. Cablevision Systems, which just came off the rejection of its ruling Dolan family’s going-private offer (see story on page 4), fell $1.42 each (4.6%) to $29.40 per share. Rounding out the sector was Charter Communications, which dipped 58 cents to $1.97 per share, down 22.8% each.
Satellite-TV stocks fared a little better but still lost ground. EchoStar Communications closed at $49.58 per share (down 41 cents, or 15%) and DirecTV Group dipped 1% (29 cents per share) to $25.22 each last Thursday.
Some of the stocks began a slight rebound in early trading last Friday — Time Warner cable was up 21 cents, Mediacom rose 30 cents and Charter was up 6 cents early in the day. But other continued their slide — Comcast fell another 22 cents, Cablevision dipped 5 cents and Time Warner Inc. rose 2 cents early last Friday morning.
The bloodbath forced several analysts to further reduce their estimates for Comcast. Bear Stearns media analyst Spencer Wang reduced his full-year revenue and cash-flow growth estimates to 11.5% and 13.1%, respectively, from 12.8% and 14.9%, based on competitive threats. But while the numbers were weak, the downturn in the stocks was seen by at least one analyst as something of a panicked reaction to a perceived threat, rather than a sign of impending doom.
“The Street may have overreacted,” wrote Citigroup analyst Jason Bazinet in a report.
On a conference call with analysts, Comcast tried to put a good face on the quarterly results, stressing that financial metrics showed continued strength — revenue was up 11% in the period, to $7.4 billion, and operating cash flow rose 13% to $2.98 billion. But investors, more concerned about competitive pressures, were having none of it.
Chief operating officer Steve Burke said that Comcast had a “fairly open field” for about a year with the triple play of voice, video and data as offerings from regional telephone companies like Verizon and AT&T were virtually non-existent. That period, he said, is over.
“Not unexpectedly, our competition got better,” Burke said. “They synthetically made a triple play by putting satellite [TV] in tightly bundled with DSL and phone. That was effective.”
Burke added that deep discounting from the telephone companies — he noted that in some markets, AT&T is bundling satellite TV service from EchoStar Communications for free for a year — and one- and two-product offerings also have had an impact.
AT&T said earlier last week that it had added about 140,000 customers through resale agreements with EchoStar and DirecTV in the quarter.
While investors may have been most skittish about the telco threat, Sanford Bernstein cable and satellite analyst Craig Moffett wrote in a research report that the overall economy and the slump in the housing market were likely the bigger factors in the disappointing results. Moffett noted that telco video overlaps just 4% of Comcast’s total footprint, too small to be a significant factor.
“With 40% of the U.S. covered by Comcast’s massive footprint, the company is simply too large to run away from the macro-economy,” Moffett wrote. “Fewer additions to the occupied housing supply mean fewer new pay-TV subscriptions — and fewer broadband subscriptions — for all players.”
MORE MARKETING
Nevertheless, Burke said that Comcast will kick up its marketing to beat back the competitive threat.
“There will be some nuances and some freshening,” Burke said, adding that one- and two-product offerings also will be added to the mix. “The real balance here is to make sure that we continue to drive the business, continue to post the kind of operating cash flow results we do.’’
The apparent sluggishness of high-speed Internet service, a perennial driver of revenue growth, also appeared to worry some investors. Burke said the numbers could suggest a slight slowdown, but not a long one.
“We think there is plenty of growth left in this market,” Burke said on the call.
Still, Burke said that there is room for some changes to be made. Comcast will selectively introduce lower speed and lower priced tiers of high-speed Internet service to capture a larger share of the dial-up market, which is becoming more price-sensitive, Burke said.
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