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Business to Drive Growth

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Cable valuations are unfair, business services are the new growth engine, wireless ventures are for the birds, and satellite competition isn’t growing as fast as you think.

Those were just a few of the points brought up in a lively panel discussion at The Cable Show last week, with Sanford Bernstein cable and satellite analyst Craig Moffett, Banc of America Securities media analyst Jessica Reif Cohen, Citigroup media analyst Jason Bazinet and Mediacom Communications chairman and CEO Rocco Commisso.

Cable valuations, at all-time lows, have been a bone of contention with operators for years. This year and last have been no exception, with large public MSOs trading at multiples ranging from four to six times forward-looking cash flow.

That is a far cry from the late 1990s, when cable stocks traded at multiples as high as 20 times. But what has irked many operators — and Commisso in particular — is that MSOs aren’t getting any credit for continuing to report consistent revenue, cash-flow and free-cash-flow growth in one of the harshest business climates in decades.

Mediacom, Commisso said, currently trades at about four times 2009 estimated free cash flow, an anemic multiple considering the stock traded as high as around $20 per share when it first went public in 1999. In 2008, after a couple of rough years, Mediacom reported 8.4% revenue and 10.3% cash-flow growth and expects to do at least as well in 2009. More dramatically, it expects to increase free cash flow to about $1 per share in 2009, a tenfold increase from the prior year. Still, Mediacom has seen no increase in its valuation.

Commisso said the same has held true for the rest of the publicly traded MSOs: Despite a bad economy, most cable operators reported high-single-digit revenue growth and double-digit cash-flow growth. None of that moved the needle in their valuations.

“When you don’t get the right multiple then, when are you going to get it?” Commisso asked.

Moffett agreed that cable valuations have been historically low in the past few years. And the disparity is even more glaring, he said, when compared to one of the industry’s newest direct competitors, the telephone companies.

“They [telcos] are AA-rated credits,” Moffett said. “But when you take into account their pension and post-retirement benefit obligations and count them as debt, they are somewhat more leveraged than Comcast. They are growing slower, yet they are trading at a 25% premium. That is very strange.”

Moffett said that not only has cable grown its existing businesses in light of the dismal economy, it is offering new services that have the potential of being new growth engines for the coming years. One such engine is business services.

Moffett said that most cable companies — with the exceptions of Cox Communications and Cablevision Systems, which have been offering business services for years — have hardly scratched the surface in the commercial market.

Moffett said that the value proposition for cable is essentially an asset play — how a company capitalizes on its existing network with little additional capital investment.

“The value proposition is, what else can you put across the network?” Moffett said. “The obvious answer is business services.”

Reif Cohen added that business services revenue at many cable operators is beginning to reach the tipping point. At Comcast, for example, commercial services revenue rose 41% last year, and the company expects similar increases in 2009.

“That is a very achievable goal,” Reif Cohen said. “Growth was very strong last year. It will become more meaningful.”

The analysts were slightly split when it came to another potential growth engine: wireless services. Although the industry is in its second wireless joint venture in the past five years — Clearwire — Moffett believes that cable companies are chasing rainbows.

“There is a tremendous desire to go tit-for-tat with the telcos,” Moffett said. “That is a very dangerous line of thinking. It presumes there is going to be a fixed mobile convergence. Not only doesn’t that exist, it probably won’t happen.”

Reif Cohen defended the Clearwire venture, and added that in both the past and present, cable operators have taken a “measured approach” when it came to wireless. The Clearwire venture is no different.

While some may see wireless as another weapon in cable’s battle against growing competition, Moffett said that the competitive threat isn’t as bad as everyone might think.

Satellite TV, cable’s main rival for the past two decades, is actually experiencing a slowdown in growth, he said.

Moffett said that satellite-TV subscriber growth was about 2.8% in 2008, slightly ahead of pay TV as a whole. He added that in 2004, satellite added 3.2 million subscribers; in 2008, those additions had slowed to 700,000 customers. Moffett also dismissed the argument that the telcos have taken up the slack; in the same period telco video customers went from zero to 1.7 million.

“The cable industry isn’t getting faced with more competition; the satellite industry has faded faster,” Moffett said.

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