Comcast _ Poster Child for Cable's Woes
Wednesday, December 5, 2007; 4:13 PM
PHILADELPHIA -- In a bad year for cable stocks, Comcast's fall has been downright ugly.
Shares of the nation's largest cable operator tumbled to a 20-month low Wednesday after it disclosed that this year's cable revenue growth and cash flow will come in lower than expected. It said consumers were balking at increasing their spending in a slowing economy and phone companies had stepped up competition.
Meanwhile, Comcast also raised its capital spending to push advanced digital set-top boxes and its digital services.
"Comcast's announcement today is the worst of all possible worlds," said Craig Moffett, senior analyst at Sanford Bernstein. "The promise of the cable stocks has always been as growth decelerates so too will capital intensity and free cash flow will rise."
The stock lost $1.81, or 8.7 percent, to close at $18.92, after earlier trading as low as $18.08. In the past year, Comcast shares have ranged from $18.83 to $30.18.
The news also pressured other cable stocks: Time Warner Cable Inc. slid 4.4 percent to $25.87 while shares of Cablevision Systems Corp. fell 4.2 percent to $25.76.
"We've seen a real softness in the business related to a combination of ... macroeconomic issues and markets and you've seen some competitive intensity," Michael Angelakis, Comcast's co-chief financial officer, said Wednesday at the UBS Global Media and Communications Conference in New York.
Cable stocks have struggled in 2007 on worries of stricter regulations, a slowing economy and competition from phone companies as they lured customers with their video services. Cable had enjoyed an advantage of being able to deliver video, Internet and phone services through one provider.
"Competition has increased and we've got to respond," Angelakis said. But "the expectation that I have is over the next couple of years we will lose some share on the video side."
Comcast is considering rolling out lower-priced services, such as an Internet and phone bundle for customers who don't get its cable TV service. It represents a "cultural shift" for a company whose core business is video, Angelakis said.
Comcast has made a decision to spend heavily on advanced set-top boxes. That decision raises spending, but doesn't necessarily bring in new customers since it tends to be marketed as an upgrade to existing subscribers, said Qaisar Hasan, an analyst at Buckingham Research Group.
Late Tuesday, the Philadelphia-based company said it expects 2007 cable revenue to increase by 11 percent, instead of 12 percent, as its forecast for the number of new subscriptions fell. Revenue generating units _ the number of services sold _ are expected to increase by 6 million to 57 million instead of by 6.5 million.
Cable operating cash flow growth is projected at 13 percent, down from 14 percent. Consolidated operating cash flow growth is expected at around 13 percent, instead of at least 13 percent. Free cash flow would fall to 80 percent of last year's level, instead of at least 90 percent.
Hasan said Comcast had been overly optimistic in its forecasts and he foresees more cuts in guidance next year.
Comcast said capital expenses will be $6 billion in 2007, 5 percent more than previously planned. The company cited increased purchases of advanced digital set-top boxes, expanded network enhancements, its digital acceleration program and other investments.
Investors closely watch a cable operator's capital expenses because the companies can spend massively to lay cable, improve their networks and roll out new hardware.
Comcast shares have been under pressure all year, but got a boost this week when the company said it would not bid in a coming auction of wireless spectrum. Investors were concerned Comcast would spend billions to expand into wireless services.