Skeptical Street Is a Drag on Comcast


Comcast Corp. stock has taken a beating in the past week — it hit new 52-week lows three times between Oct. 13 and Oct. 18 — as investors became skittish over reports that the No. 1 MSO in the country could be teaming up with Internet search giant Google Inc. to buy a minority stake in America Online Inc.'s portal business.

Although the stock has declined more than 18% this year, at least one analyst believes those fears are unfounded and sees the depreciation in the shares as a possible buying opportunity.

<p>On the Way Down</p><p>Comcast's stock price slips to new lows.</p>









In a research report, Lehman Bros. cable and satellite analyst Vijay Jayant said Comcast shares have begun to reflect a favorable risk/reward profile with the decline.

Comcast shares were trading at $32.39 on Jan. 3. The stock closed at $26.36 each on Oct. 18. It hit new lows of $26.78 per share on Oct. 13 (closing at $26.82), $26.65 on Oct. 17 (closing at $26.77) and $26.33 on Oct. 18.

While Jayant wrote that Comcast does face increasing competition in its three business lines — video, voice and data — he believes that near-term prospects are good.

Although Jayant said the seasonally strong third quarter — the Philadelphia-based MSO is expected to release the period's results on Nov. 3 — could show some weakness in high-speed Internet subscriber additions, the rollout of voice-over-Internet protocol telephony in the latter half of 2005 and through 2006, combined with the potential acceleration of share buy-backs “could renew enthusiasm in the name.”

Jayant expects Comcast to report third-quarter revenue growth of 8.6%, to $5.27 billion, and cash-flow growth of 14.9%, to $2.14 billion. Basic subscribers should rise by 28,000 customers in the quarter, while digital-cable additions should come in at 292,000, with 440,000 additional high-speed Internet customers and 58,000 additional telephone customers.

Jayant's 440,000-subscriber high-speed Internet estimate is below the consensus estimate of between 460,000 and 470,000 subscribers.

But the biggest catalyst for the stock could be an accelerated share buyback program. While Comcast has about $2 billion left on its current buyback program, Jayant estimates that the MSO could boost that program by another $3 billion and still stay within its leverage parameters.

According to Jayant, if Comcast completed the entire $2 billion buyback by the end of the year, its net debt would be just 2.7 times estimated 2005 cash flow, down from 2.8 times at the end of 2004. Buying back an additional $3 billion worth of shares (making the total second-half 2005 buyback $5 billion of stock) would take leverage to just three times 2005 estimated cash flow, still below the 3.3 times leverage the company had in 2003.

Jayant also sees the potential of an AOL deal as a positive for Comcast, particularly if the MSO gains access to the 4.5 million to 5 million AOL dialup subscribers within its footprint.

“Having direct-marketing access to these customers, or the ability to offer them benefits when upgrading to Comcast cable-modem service that DSL [digital-subscriber line] providers cannot (such as the ability to keep an e-mail address) would, in our opinion, generate value for Comcast,” Jayant wrote.

It's unclear, however, if that relationship would require an equity investment in AOL, Jayant added.