Comcast Gets Smacked By Wall Street, Media

Getting the double whammy--from Wall Street and Main Street--is inflicting some notable pain on Comcast, the country's largest cable operator, at a time when the entire industry is under scrutiny.

In many ways, the Comcast Must Die campaign and blog launched online earlier this month by Advertising Age columnist Bob Garfield gives exceptional prominence to the grassroots frustration with cable in general, and Comcast in particular. It not so coincidentally coincides with the decision by Comcast CEO Brian Roberts to address public questions and concerns in print in the Nov. 26 issues of Fortune owned and controlled by the second-largest cable operator, Time Warner, a certain ally.

Garfield's campaign has attracted nearly 100 posted comments to the blog, where he relayed the gist of his original Sept. 9 column, bitterly chronicled his travails in getting digital telephone service at his Maryland home. It's an all-too-familiar tale of woe for many consumers, and a nightmare for an industry that has had a chronic struggle to improve and manage customer-service issues.



The campaign coincides with recent reports from industry analysts that highlight the schism between Comcast's stellar financial performances this year and its languishing stock price. Some take a decidedly negative turn from what generally is positive, supportive coverage, such as Goldman Sachs analyst Anthony Noto, who examines Comcast's "new extreme downsides." Noto has reduced his target price for Comcast to $29 a share from $34 a share. That's based on revised estimates for a 10% loss in basic subscribers by year-end 2010, with minimal rate increases and an incremental 6% reduction in annual broadband net additions.

By the same token, Noto said he expects a 20% upside in Comcast shares, which are down more than 15% in 2007. Bottom line: Comcast stock has been identified as one of the cheapest by some analysts, such as Craig Moffett of Bernstein Research, who believes the stock could soar to $40 a share within the next year.

Concerns regarding Comcast and the cable industry at large involve increased video competition from satellite and telephone companies, minimal growth in the mature high-speed Internet business and the limited return to shareholders on the way it invests cash flow. Worst case, Verizon and AT&T could garner 25% to 30% video penetration of homes marketed for video by 2010, taking high-speed and telephony subscribers with them. As a result, Noto is lowering his overall revenues and earnings estimates for Comcast by 2010.

Some of the other uncertainties surrounding cable--lack of exposure to international growth markets, unexpected sensitivity to economic slowdown and housing's vulnerability to the debt and credit crisis--provide a troubled backdrop for investor concerns.

Bernstein's Moffett also notes that Comcast's stock price is adversely impacted by unusual intangible factors, such as investors' incessant belief that the cable giant is on the cusp of a major acquisition or constructing its own Wi-Fi network by accumulating more spectrum--despite management's comments to the contrary. "The distrust (of Comcast) goes deeper than just M&A. Comcast is almost certainly on the brink of a massive--gargantuan, really--plant upgrade that will cost billions," Moffett wrote in a caustic note. Comcast recently told analysts that its capital investments has been holding steady at 18% of revenues until this year's pop to $5.7 billion (reflecting upgrades to the acquired Adelphia systems), but still delivers a rising 34% return on investment.

Moffett's recent report "Comcast: Putting Paranoia in Perspective" aims to check the unsubstantiated investor perception that the company is troubled by video competition from telephone companies, economic turmoil and the potential slowdown in broadband growth. The truth is Comcast's resilient growth, which includes earnings climbing at twice the market rate (and expected to grow 35% in 2008), does not warrant its stock underperforming the S&P by 22% this year, most of it coming since July.

Telephone company video overlaps only about 4% of Comcast's 47 million-home footprint, and even the noticeable decline in broadband's contribution to the company's growth (to 19% from 47% several years ago) will not materially dent its overall growth, Moffett said. Comcast has 24 million cable customers, 12.4 million high-speed Internet customers and 3.5 million voice customers.

With Comcast's fundamentals essentially strong and unchanged, the recent meltdown in shares and the collapse of investor sentiment are difficult to explain, other than unfounded paranoia run amok. According to Moffett, "there is nothing material to support why Comcast's valuation should be at trough levels while its growth remains at record levels."

This troubling dichotomy has only been made worse by Garfield's homegrown media crusade to challenge Comcast and all of U.S.cable, which is why Comcast should be contemplating a more constructive response than a safe magazine interview. Customer service has never been the cable industry's strong suit.

So far, response to Garfield's "comcastmustdie" blog has been interesting but not overwhelming. Posted comments run the gamut from valid complaints and absurd stories to criticism of the posters. The most riveting have been from Garfield, whose wit has taken the edge off the crusade. Despite his painful retelling, Garfield wrote: "Actually, I have no death wish for Comcast or any other gigantic, blundering, greedy, arrogant corporate monstrosity. What I do have is an earnest desire for such companies to change their ways."

What is most fascinating is that Garfield is utilizing the same interactivity Comcast is trying to monetize in hopes of keeping the $75 billion company's customer service in check. Clearly, all service and product providers will need to devise more proactive and positive ways to respond to the connective consumers who know no digital bounds and can be heard in many new and effective ways.

Even after hiring some 6,000 additional customer service reps and 5,000 more technicians this year, Comcast continues to struggle with customer service--although it does not appear to have adversely impacted its growth at any level. In fact, Moffett observes that cable operators in general are growing at the fastest rate in more than a decade, even in the face of fierce competition. In the first half of 2007, Comcast earnings increased more than 50% on a 31% rise in revenues compared to the first six months of 2006, some of which the company attributes to the strength of its triple play of cable TV, high-speed Internet and telephone services.

Ultimately, the only way for Comcast to pacify unsettled investors is to institute a dividend to quell concerns the company will use its cash hoard--nearly $3 billion in free cash flow this year and an estimated $20 billion in borrowing power--for a mega acquisition, like its foiled $54 billion bid for Disney in 2004. The acquisition targets most mentioned include General Electric's NBC Universal, Yahoo and Virgin Media. Comcast would like to expand its programming, which now includes ownership of TV channels such as E! Entertainment, Gold Channel and PBS Kids Sprout, but which collectively contributes less than 5% of the company's overall $25 billion in annual revenues. "That is part of the price of running your company opportunistically. Right now, we are very content with our company," Comcast's Roberts said of the speculation on CNBC Monday.

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