Bilotti: Forget About Free Cash Flow

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Chicago -- Morgan Stanley Dean Witter & Co. cable analyst Richard Bilotti
told a group of operators and investors late Monday that if cable wants to
continue to ride the growth wave in the midst of an economic downturn, it should
focus on rolling out new services.

Bilotti, speaking as part of a Wall Street panel at the National Show here,
was an early champion of free cash flow -- cash flow minus capital expenditures
-- as a way to gauge cable operators' success. But he has apparently had a
change of heart, urging operators to instead focus on growing the subscriber
base for new services.

'Enough about this free-cash-flow nonsense,' Bilotti said. 'It's the worst
benchmark. Phillip Morris [Cos. Inc.] has tons of free cash flow and trades at
about eight times [cash flow]. What you need to focus on is return on invested
capital.'

The ROIC on digital cable and cable modems is so far above the cost of
capital that operators should be 'reinvesting every dime of cash flow you can
get your hands on' into new services, he added.

Other panelists agreed that cable's outlook for the long term was bright.

Merrill Lynch & Co.'s Jessica Reif Cohen considered current cable
cash-flow multiples 'stretched.' She expected money to continue to flow out of
the cable-operator sector in the short term, especially if News Corp. or
EchoStar Communications Corp. acquires direct-broadcast satellite powerhouse
DirecTV Inc.

'[News Corp.] will use all of its leverage points in competition with cable
operators in rolling out a more robust platform,' she added.

Cohen said any sign of a rebound in the advertising market could trigger a
rotation of money from cable operators toward other media stocks. Still, she was
optimistic in the long term for cable, with high cash-flow and revenue growth, a
benign regulatory environment and the promise of new services.

She placed an 18-times-cash-flow target multiple on cable operators, adding
that she does not include interactive services, which could add another four
points to that valuation when they are rolled out.

Salomon Smith Barney analyst Niraj Gupta disagreed that investors would bail
once the ad market shows improvement. 'I don't think we will see sector
rotation,' he said. 'I think cable is in a very strong position.'

Bear Stearns & Co. analyst Ray Katz said DBS providers hold the
'marketing high ground' because of their national footprint, but cable has the
tools and products to come out ahead.

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