Morgan Stanley Dean Witter & Co. principal Richard
Bilotti lowered his rating on Comcast Corp.'s and Cablevision Systems Corp.'s stocks last
Tuesday, sounding one of his periodic notes of caution about the high-flying cable sector.
Bilotti, Gary Lieberman and Bobby Rakhit wrote in their
report issued July 6 that while cash-flow-growth rates -- 10 percent to 15 percent over
the next 12 to 18 months -- will drive cable stocks, higher interest rates will have a
depressing effect on the debt-heavy sector.
As a result, the trio downgraded Comcast and Cablevision
from "strong buy" to "outperform" and revised price targets for both
The Comcast target is $45 per share over a 12- to 18-month
period, down from $40 for year-end 1999. The Cablevision target is $82 per share for the
12- to 18-month period, extended from $82 at year's end.
"The expected returns assume that rising interest
rates will cause industry valuation multiples to plateau, but this will not be sufficient
to cause a long-term contraction in valuation multiples," the analysts wrote.
Comcast and Cablevision stocks reacted badly immediately
after the report, with Cablevision hit hardest, dropping $4.13 per share on the news to
close at $70.38 last Tuesday. Comcast dropped 94 cents to $38.25, and Adelphia
Communications Corp. was down $2.81 per share to $62.13.
However, the sector began to rebound the following day,
with Comcast gaining $1.75 per share to close at $40 and Cablevision gaining 63 cents per
share, closing at $71. Adelphia's stock rose by 50 cents per share last Wednesday, closing
Other analysts were cautious in their reaction, but they
remained optimistic about cable stocks.
SG Cowen Securities Corp. analyst Gary Farber said that
while Bilotti's statements were justified, most investors continue to be bullish on the
Farber added that cable stocks are likely to trade at high
multiples mainly because of the aggressive deal climate. "The deal market is still
strong," he said. "These stocks are going to trade up."
Last week's big deal -- in which Cox Communications Inc.
traded $2.8 billion in AT&T Corp. stock back to AT&T for cable systems, cash and
other considerations -- was valued by Cox at $4,230 per subscriber, which affirms the
relatively high prices paid in recent months for big cable systems.
Farber added that while interest rates and downgrades will
still have an impact on individual stocks, investors tend to look for the reasoning behind
ratings changes before making any rash decisions.
"The second quarter looks good for the most part, and
the business looks good," Farber said. "Cable stocks are still good places to
The downgrade apparently hasn't alarmed many MSOs,
especially since Bilotti reiterated throughout the report that the cable sector would
"I guess what he's saying is that to stay on his
'strong buy' list, you have to look for appreciation of 15 percent to 20 percent for the
near term," one MSO executive said. "Instead, he sees Comcast appreciating at 10
percent to 15 percent."
However, the executive added, cable stocks have enjoyed a
pretty significant run-up in the past few months, and it was inevitable that at least one
analyst would begin to recommend some caution.
"He's refining his outlook," the executive said,
adding that Comcast stock has increased by about 30 percent in the past three months.
This is not the first time Bilotti has changed his view of
the cable industry.
In January 1998, Bilotti and analyst Marc Nabi downgraded
the entire cable sector -- save for Cox and Time Warner Inc. -- from
"outperform" to "neutral," based on the assumption that cable stocks
had maxed out, and that they did not reflect risks of potential rate regulation and
investments in new services.
Bilotti restored the higher rating in July 1998, based on
the prospect of AT&T acquiring Tele-Communications Inc. In the meantime, most major
MSO stocks rose by around 50 percent or more.
Bilotti did not return a phone call last week.
Janco Partners analyst Ted Henderson, who downgraded cable
stocks in December, said Bilotti's decision to lower his ratings on Comcast and
Cablevision was based mainly on price.
Henderson added that while cable stocks have been trading
on the strength of recent multibillion-dollar deals like AT&T's pending $62 billion
acquisition of MediaOne Group Inc., the cable industry is entering a new stage of
"We're entering a phase beyond the consolidation
euphoria," Henderson said. "[Bilotti] is acknowledging that execution and
deployment are two separate things. I think that in the execution and deployment phase,
there are going to be bumps in the road. In the next 12 to 18 months, we'll get a clearer
Although cable stocks are trading mainly on the promise of
new advanced services like high-speed Internet, digital television and telephony, there is
no assurance that customers will buy those services in large numbers, Henderson said.
However, his extended outlook for the cable industry is still bullish.
"Long-term, I think [Bilotti] loves where the cable
guys are going to land," Henderson said. "Long-term, I love where the cable guys
are going to land."
Bilotti saved his highest praise for Time Warner, the only
company in the cable sector for which Morgan Stanley maintained a "strong buy"
rating. Most of that is based on the company's strong presence in television content.
The analysts had more cautious words for AT&T, however.
Although the report stated that AT&T's strategy to deliver telephony services over
cable lines was correct, "We do not believe that the market fully recognizes the
execution issues that surround this complex strategy."