Atlanta -- Cable bulls roamed Wall Street-related
panels at the National Show here last week.
During a panel last Monday, Laura Martin, director of
equity research at Credit Suisse First Boston Corp., laid out a strong case for why new
services like digital video, high-speed data and telephony have slashed the risk of
investing in cable stocks.
Martin's conclusion was that cable stocks have so much more
upside in the form of revenue from new services than risk from execution failures, so
investors should "aggressively" buy cable stocks.
Her analysis: Of the five big MSO stocks, the broadband
plant (after backing out noncable assets) is valued by the market at about $1,340 per home
passed. The core cable business alone is valued at about $1,245 per home passed.
And new revenue streams, adjusted for penetration rates
over time, have a present value of about $1,011 per home passed. Therefore, she said, the
upside potential of stocks rising to reflect that unrecognized value is 10 times greater
than the downside risk of prices falling because of such factors as equipment delays,
increased competition or regulatory constraints.
"Well, it sounds like Miller time to me," cracked
moderator Julian Brodsky, Comcast Corp.'s vice chairman, after Martin wrapped up.
Dan Reingold, senior equity-research analyst at Merrill
Lynch & Co., addressed one segment of cable's competition: telephone companies.
The telco analyst said he was "bullish on the last
mile," including regional Bell operating companies and competitive local-exchange
carriers like Teleport Communications Group. That resource is scarce and costly to
duplicate, he said.
By extension, that last-mile bullishness extends to cable,
Reingold said, especially as it relates to long-distance phone companies like AT&T
Corp. Bells and long-distance carriers could each lose 25 percent market share to the
other over the next 10 years, but the Bells would have almost no capital expense -- just
customer-acquisition costs. AT&T is most exposed on the residential side of the
business. So it makes sense that AT&T will eventually seek some strategic coupling
with cable, he said.
The catalyst for an AT&T-cable deal could come when the
first Bell is allowed to offer long-distance calls within a state, Reingold said. That
could come in mid-1999, and Bell Atlantic Corp. in New York could be first, he added.
Reingold said he doesn't yet include
digital-subscriber-line revenue in his Bell forecasts, but he added that there was a big
potential upside from using DSL for high-speed data over copper lines.
At another panel last Tuesday, Michael Connelly, managing
director at investment bank Donaldson, Lufkin & Jenrette, said historic endorsements
by the likes of Comcast investor Microsoft Corp. helped to shift perceptions of cable from
an "entertainment product" to "a broadband product" with video as one
of several real or potential revenue streams.
As operators approach the end of a rebuild cycle, capital
spending will decline, and more free cash will be left over, fueling a continued rise in
stock prices, Connelly said. "Our view is that there still is some room [for
Even with annual subscriber-growth rates of up to 2 percent
and rate increases in the mid-single-digits, operators should be able to generate 10
percent or higher annual revenue and cash-flow growth, and stocks should rise by about 25
percent over the next few years, Connelly said.
Connelly predicted that at least one operator would go
public in either the second or third quarter of this year, and he offered to take panelist
Rocco Commisso's company, Mediacom LLC, public, as well.
Mediacom chairman Commisso said he wasn't going public, but
he added that it was amazing that it's taken so long before cash-flow-generating cable
operators could again attempt initial public offerings. That's a sign of the new
perception of cable, he said. But he added that he wished it had taken another year for
investors to draw that conclusion: In that time, he might have been able to buy more cable
systems in his price range.