Group finds deterioration in revs per subscriber unlikely
Cable stocks are getting a bum rap on Wall Street, Prudential Equity Group said Tuesday.Leading cable stocks Comcast, Cox and Cablevision have seen their shares fall by nearly 20% this year, as investors got spooked that deal-hungry cable ops might pursue profit-dampening acquisitions just as they were starting to generate substantial free cash flow. They also fear an impending price war with telcos for high-speed Internet services. Both fears are overstated, according to Prudential Equity Group. Based on the current stock prices, the market is expecting a drastic deterioration in revenue per subscriber that seems unlikely to occur, Pru concluded Tuesday. In fact, to justify Comcast’s current share price, Pru reckons average revenue per customer would have to fall nearly 60% over the next 10 years. And when market giant Comcast announces its second-quarter financial results this morning, firm is expected to announce plans to increase its current $2 billion stock buyback plans in a bid to boost the value of its shares. Company’s recent asset-share swap with Liberty Media will give it an extra $545 million in cash that could be used to buy back stock. A $2.5 billion buyback is equal to around 4% of its share base. But analysts reckon Comcast could ultimately afford to buy back as much as 15% of its outstanding stock. In a note Tuesday, bank reiterated its confidence in the sector overall and upgraded Comcast in particular to “overweight” from neutral. Bank said that while investors were right to weigh concerns that cablers might pursue acquisitions or the prospect of rising interest rates, the current climate overstates the threat from satellite or a high-speed Internet price war with the telcos. Telcos SBC, Verizon and Bell South have all discussed plans to roll out their own video services via fiber or as part of an alliance with EchoStar and/or DirecTV. But Prudential said these alliances did not pose an effective substitute to cable’s integrated triple-play. Even predictions that cable companies might drastically — and unnecessarily — slash prices may be premature, pundits say. Cablevision recently offered up a $90 package of video, voice and telephony, but for a very restricted promotion. With interest rates expected to rise next year (which raises the financial return required by public equities), Pru nevertheless reduced its price target on Comcast from $43 to $39. Prudential maintained its “underweight” rating on Cablevision, however, noting concerns about management’s ability to pull off the Rainbow DBS spinoff. Comcast shares closed up 2.2% Tuesday at $28.74. Cablevision shares were up 1.3% to $18.29.
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