Analyst to MSOs: Don’t Buy Adelphia


New Orleans -- The path toward healthy multiples for cable stocks is a relatively simple one, according to a panel of cable analysts at the National Show here Tuesday: Generate consistent free cash, continue to grow and don’t buy Adelphia Communications Corp. (at least not yet).

“Nobody needs Adelphia,” Bear Stearns Cos. Inc. media analyst Ray Katz said. “Don’t pay up.”

He and the other panelists had several other suggestions, but the gist was the same: Keep generating free cash (cash flow after interest payments and capital expenditures are made), continue to roll out new services and start sharing more of the wealth with shareholders.

“Free cash flow is the great equalizer,” Banc of America Securities LLC analyst Doug Shapiro said. Once companies start reporting consistent levels of free cash, they’ll attract new investors and force the Street to alter their focus on long-term risks.

Shapiro added that one of the biggest complaints about cable -- investors don’t focus on the revenue and cash flow the industry is generating now, but they are preoccupied with future potential risks -- could be squelched with several quarters of free cash flow.

“If you focus on generating free cash flow today, people might not get so wound up because they’re getting paid right now,” Shapiro said.

UBS Warburg LLC cable debt and equity analyst Aryeh Bourkoff was a little more skeptical, saying that the industry shouldn’t sacrifice growth to achieve the metric.

Bourkoff prefers that cable companies pump at least 50% of their free cash flow back into the business, mainly on customer-premises equipment that could drive additional revenue.

Morgan Stanley Dean Witter & Co. media analyst Rich Bilotti said that while free cash flow is great, the key issue is convincing investors that the sector has both a return of capital and a return on capital.

The return of capital, Bilotti explained, would be in the form of a dividend, hopefully within 12-24 months. Return on capital would be by focusing on reporting earnings per share.