Comcast CMCSK
January 07, 2008 - 10:04pm EST by
thistle933
2008 2009
Price: 16.90 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 53,000 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Comcast (CMCSK)
At $16.87, Comcast is trading at 6.0x 08 EBITDA (using expected 12/07 debt of $31B). It should deliver free cash flow (fully burdened for growth capex) in 2008 of $0.65-$0.75 per share.  Assets that generate no EBITDA are worth approximately $1.50-2.00 per share.  If they grow EBITDA over the next five years at 5% annually and maintain 2.5x Debt/EBITDA, they would create an additional $0.45 per year of distributable cash, which means Comcast is trading at about a 7-8% yield on distributable cash flow.  If 5% EBITDA growth translates into 6-7% fcf growth (due to capex growing more slowly than EBITDA), implied returns for a long-term holder equal 13-14%.
 
Now let’s assess the claim that actual results in the next five years will likely be at or above those just described.  In what follows, I am not suggesting the most likely case but the most conservative one that seems plausible.
 
Impact of new entrants into video market
Market Growth
TV households grew at 1.6% 1998-2005 (to 110 million) driven largely by growth in occupied housing of a little over 1%.  The pay TV household market grew 3% per year (to 94 million homes), as pay TV steadily increased its share of the TV market.  Annual growth of 2-3% in the pay TV market over the next five years means the pay TV market would grow by 10-15 million homes.  Slower household formation in the next several years due to the housing downturn (relative to the 1998-2005 period) may be offset by the Feb 09 FCC requirement that all televisions be able to receive a digital signal; many non-pay TV households may sign up for pay TV rather than acquire a subsidized digital converter.  10 million new pay TV households is a conservative estimate of market growth over 5 years.
 
RBOC Entry
Assume AT&T rolls out U-Verse to 30 million households and Verizon rolls out FiOS to 18 million over 5 years.  Now assume both get 25% penetration.  This is, roughly speaking, what both companies claim they will do.  While there is some probability they will do better than they now target, the hurdles to even achieving these results are material.  Bear in mind that the scalability of U-Verse’s video technology is still not conclusively proven; they ended Q3 with 126K subs and it seems unlikely that they can produce an equivalent product to FiOS while spending, as they are, dramatically less on capex.  Nevertheless, T claimed 12/07 they were adding 10K video subs per week and would move to 40K subs per week by 12/08.  Giving T the benefit of the doubt, assuming VZ & T together achieve 12 million video subs seems reasonably conservative.
 
Satellite
A conservative estimate of satellite’s likely share is harder to gauge, as constant net adds, combined with constant churn, must result in lower net adds every year.  Together DTV & DISH added 2.4 million, 3.3 million, 2.3 million, 1.9 million and 1.9 million (estimate), respectively in 2003-2007E.  Neither has shown any ability to materially increase gross adds or lower churn since 2004.  Given constant churn, each year of sub growth adds further downward pressure to net adds.  Competition from VZ & T make it unlikely that either gross adds or churn sustainably improves for either player.  If that is the case, net adds must fall to about 500K per year for each by 2009.  Assume DISH & DTV take 5 million additional subs over the next 5 years. 
 
Total video share loss
In sum, a conservative case assumes that the pay TV market grows by 10 million, but non-cable grows by 17 million, so cable loses 7 million subs.  Comcast currently has 37% share of cable market.  Losses are likely to come disproportionately from weaker cable players, but let’s assume Comcast give up share pro rata, losing 2.6 million subs by 2012, or about 2.2% per year.
 
Overall Growth Rate
Video
Video ARPU increased 5% yr/yr in Q3 07, down from increases of 8%, 6% and 6%, respectively, in Q3 06, Q3 05 and Q3 04.  These increases are driven by price increases (themselves driven by programming cost), and increased penetration of higher cost video products (digital, DVR, HDTV).  Entry by VZ & T will likely inhibit video ARPU growth.  It is too early to say how aggressively the RBOCs will price, though early indications from Verizon seem modestly encouraging.  Also, because of their small base, both T & VZ will continue to operate at a disadvantage in programming costs, which should dampen their willingness to price the product below the levels now set by cable and satellite.
 
If competition drives video ARPU increases down to 3-4% annually, then video revenue growth would eventually slow to 1-2%.  Over the long term ARPU increases below nominal GDP seem unlikely -  programming costs will continue to be passed on and continued technological innovation should permit Comcast to charge more for improved products.  Share loss should eventually abate as VZ & T achieve their targeted penetration rates and the industry reaches a new equilibrium.  As this happens, overall video growth should return to the assumed 3-4%. 
 
Phone
Comcast should do to the RBOCs in voice what we are assuming the RBOCs do to it in video - 25% penetration of homes passed, which for Comcast would mean roughly 50% of basic subs.  Cablevision now sells phone service to 50% of its basic video subs and continues to increase that penetration rate.  Comcast targets 23% penetration of homes passed by 2009 (11 million subs vs 3.4 million on avg for 2007).  All in it is conservative to assume Comcast’s phone revenues should at least triple by 2011 relative to 2007. 
 
High Speed Data (HSD)
HSD penetration is now 54% of Comcast’s video base.  While the U Verse and FiOS product should be as good as cable’s HSD, DSL is inferior and has begun to cede share.  Assuming Comcast eventually penetrates 75-80% of its customer base (Cablevision is now at 71%), Comcast should continue to grow subs by low double digits in the near term and low single digits beyond the next 2-3 years.  Doing so, however, will pressure ARPU, as Comcast lowers price to pick off more resistant adopters.  To date, Comcast has maintained flat HSD ARPU, but Time Warner’s HSD ARPU slipped 2-3% yr/yr in Q3 07 and Comcast’s probably eventually will as well.  A near term revenue growth in the low double digits giving way to low single digit growth further out seems conservative.  So far, wireless HSD products (Clearwire) or broadband over power lines do not pose material risks to pricing or sub count, but there is some possibility they will in the future.
 
Small-Medium Business (SME)
Comcast expects this to be a $2.5 billion revenue business by 2011.  While we don’t have data to evaluate this claim, and management’s credibility on its own has been compromised, my own anecdotal observation is that the RBOC data and voice products to small businesses are significantly overpriced, about 2x the pricing for the same product to residences.  Cable should be able to move in under this pricing umbrella easily and still maintain the 50% margin they target.
 
Online advertising
Management claims they can add $1 billion in annual revenue by 2011 through interactive advertising to internet customers (search, interactive ads, display ads).  If so, it would probably be high margin, but they have not proven this concept yet and a conservative set of projections would not give them much credit for this.
 
Total revenue growth
Management claimed in early 07 they would grow revenue 12% per year 2007-2009.   They will do 10-11% 2007 and 8-9% Q4 07.  Add up everything I just said and you get 7% revenue growth CAGR through 2012. 
 
EBITDA margins expanded over the last several years and management predicted (March 07) that they would continue to expand 2007 - 2009.  RBOC entry may inhibit price increases and will certainly drive higher marketing expenses.  Also, HSD’s rapid growth over the last several years shifted mix toward a product with much higher than corporate-level margins.  The growth driver over the next several years, telephony, may not offer comparably high margins.  All in, it seems safer to assume flat EBITDA margin or some margin compression than expansion.  If revenue grows at 7% per year through 2012 and margins compress by 300 basis points EBITDA would compound at 5% per year.
 
Capex
Comcast’s inability or unwillingness accurately to predict its own capital needs is now justly infamous.  There is a crucial difference, however, between capital prediction and capital allocation.  Listening to management capex predictions is obviously pointless.  However, that does not mean they have misallocated capital invested in the physical plant (including digital boxes in the home).  EBITDA, net of capex in 2007 will be approximately $5 billion.  Comcast’s net physical plant (the only asset they have to replace) at the beginning of the year was $26 billion (assuming “Other intangible assets” needs replacement).  A 19% pretax return on capital for a business that can be levered 4-5x EBITDA suggests capital invested in the plant is well spent.  Further to this point, Comcast compounded EBITDA/share at 11% per year 1997-2007; had they not delevered the company over that time period, the CAGR would have been 15%.  Examining increases in EBITDA for the last 3 years relative to capital spent would support a similar conclusion – when Comcast has invested in its own plant rather than acquisitions, its results are satisfactory. 
 
Cablevision, which is approximately 2 years ahead of Comcast in penetrating its customer base with phone, HSD and digital (the last of which is the most capital intensive), saw a 16% absolute decline in its cable capex this year, to about $200 per basic sub.  This was driven largely by the fact that it reached a critical mass penetration of the capex-intensive digital product (Q4 06 was 78%).  Moreover, Cablevision’s capex decline came in the face of RBOC video rollout that already covers 23% of its footprint.  Comcast will spend about $250 per sub this year but get to a 78% digital penetration mid 2009, at which point they should start to get some relief from capital spending pressure.
 
Overall on capex, there is a significant chance that it will not increase materially from the 2007 level of $6 billion and may even decrease, but given the company’s history and given that RBOC entry will also push capex spending higher, it seems wiser to assume continued capex increases, albeit at a slower rate than growth in EBITDA. 
 
If capex simply grows 100-200 bps slower than the 5% CAGR we are assuming for EBITDA, free cash flow per share would grow at 6-7%.
 
Conclusion
If you’ve made it this far, I am, frankly, surprised.  I doubt any of the 3 people who visited my AET writeup last year made it to the end and I expect less interest in this idea. 
 
Regardless, a final comment on timing.  While a long-term shareholder should do well from here, you may well get a chance to buy this business at a better price.  The housing downturn is obviously ongoing and will continue to pound their basic sub numbers for at least several quarters, as well as pressure their HSD adds lower.  DTV’s stepped-up promotion of its high def offering will make itself felt more in Q4 than Q3.  DISH had a rotten Q3 for net adds and can be counted on to return with a vengeance in Q4.  Moreover, the RBOCs will add video subs in Q4 at an increased rate relative to Q2 or Q3.  While capex should eventually conform to the assumptions mentioned above, the CFO Angelakis on a 12/07 conf call sounded like capex might actually increase materially in 2008. 
 
More fuzzily, I do not think Comcast management has yet transitioned the company into the fighting machine it will eventually learn to be.  Despite much talk about how competitive the world is, they have enjoyed relatively benign duopoly/oligopoly status for years, in which the primary operational challenge was just to meet rapidly growing demand for utility-like essentials, not to market products and service customers in such a way as to win in a predatory competitive landscape.  Reading between the lines of Roberts on the last quarterly call, he basically admitted as much.  If you like this idea, buckle your seat belt.
 

Catalyst

Market realizes the above
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    Description

    Comcast (CMCSK)
    At $16.87, Comcast is trading at 6.0x 08 EBITDA (using expected 12/07 debt of $31B). It should deliver free cash flow (fully burdened for growth capex) in 2008 of $0.65-$0.75 per share.  Assets that generate no EBITDA are worth approximately $1.50-2.00 per share.  If they grow EBITDA over the next five years at 5% annually and maintain 2.5x Debt/EBITDA, they would create an additional $0.45 per year of distributable cash, which means Comcast is trading at about a 7-8% yield on distributable cash flow.  If 5% EBITDA growth translates into 6-7% fcf growth (due to capex growing more slowly than EBITDA), implied returns for a long-term holder equal 13-14%.
     
    Now let’s assess the claim that actual results in the next five years will likely be at or above those just described.  In what follows, I am not suggesting the most likely case but the most conservative one that seems plausible.
     
    Impact of new entrants into video market
    Market Growth
    TV households grew at 1.6% 1998-2005 (to 110 million) driven largely by growth in occupied housing of a little over 1%.  The pay TV household market grew 3% per year (to 94 million homes), as pay TV steadily increased its share of the TV market.  Annual growth of 2-3% in the pay TV market over the next five years means the pay TV market would grow by 10-15 million homes.  Slower household formation in the next several years due to the housing downturn (relative to the 1998-2005 period) may be offset by the Feb 09 FCC requirement that all televisions be able to receive a digital signal; many non-pay TV households may sign up for pay TV rather than acquire a subsidized digital converter.  10 million new pay TV households is a conservative estimate of market growth over 5 years.
     
    RBOC Entry
    Assume AT&T rolls out U-Verse to 30 million households and Verizon rolls out FiOS to 18 million over 5 years.  Now assume both get 25% penetration.  This is, roughly speaking, what both companies claim they will do.  While there is some probability they will do better than they now target, the hurdles to even achieving these results are material.  Bear in mind that the scalability of U-Verse’s video technology is still not conclusively proven; they ended Q3 with 126K subs and it seems unlikely that they can produce an equivalent product to FiOS while spending, as they are, dramatically less on capex.  Nevertheless, T claimed 12/07 they were adding 10K video subs per week and would move to 40K subs per week by 12/08.  Giving T the benefit of the doubt, assuming VZ & T together achieve 12 million video subs seems reasonably conservative.
     
    Satellite
    A conservative estimate of satellite’s likely share is harder to gauge, as constant net adds, combined with constant churn, must result in lower net adds every year.  Together DTV & DISH added 2.4 million, 3.3 million, 2.3 million, 1.9 million and 1.9 million (estimate), respectively in 2003-2007E.  Neither has shown any ability to materially increase gross adds or lower churn since 2004.  Given constant churn, each year of sub growth adds further downward pressure to net adds.  Competition from VZ & T make it unlikely that either gross adds or churn sustainably improves for either player.  If that is the case, net adds must fall to about 500K per year for each by 2009.  Assume DISH & DTV take 5 million additional subs over the next 5 years. 
     
    Total video share loss
    In sum, a conservative case assumes that the pay TV market grows by 10 million, but non-cable grows by 17 million, so cable loses 7 million subs.  Comcast currently has 37% share of cable market.  Losses are likely to come disproportionately from weaker cable players, but let’s assume Comcast give up share pro rata, losing 2.6 million subs by 2012, or about 2.2% per year.
     
    Overall Growth Rate
    Video
    Video ARPU increased 5% yr/yr in Q3 07, down from increases of 8%, 6% and 6%, respectively, in Q3 06, Q3 05 and Q3 04.  These increases are driven by price increases (themselves driven by programming cost), and increased penetration of higher cost video products (digital, DVR, HDTV).  Entry by VZ & T will likely inhibit video ARPU growth.  It is too early to say how aggressively the RBOCs will price, though early indications from Verizon seem modestly encouraging.  Also, because of their small base, both T & VZ will continue to operate at a disadvantage in programming costs, which should dampen their willingness to price the product below the levels now set by cable and satellite.
     
    If competition drives video ARPU increases down to 3-4% annually, then video revenue growth would eventually slow to 1-2%.  Over the long term ARPU increases below nominal GDP seem unlikely -  programming costs will continue to be passed on and continued technological innovation should permit Comcast to charge more for improved products.  Share loss should eventually abate as VZ & T achieve their targeted penetration rates and the industry reaches a new equilibrium.  As this happens, overall video growth should return to the assumed 3-4%. 
     
    Phone
    Comcast should do to the RBOCs in voice what we are assuming the RBOCs do to it in video - 25% penetration of homes passed, which for Comcast would mean roughly 50% of basic subs.  Cablevision now sells phone service to 50% of its basic video subs and continues to increase that penetration rate.  Comcast targets 23% penetration of homes passed by 2009 (11 million subs vs 3.4 million on avg for 2007).  All in it is conservative to assume Comcast’s phone revenues should at least triple by 2011 relative to 2007. 
     
    High Speed Data (HSD)
    HSD penetration is now 54% of Comcast’s video base.  While the U Verse and FiOS product should be as good as cable’s HSD, DSL is inferior and has begun to cede share.  Assuming Comcast eventually penetrates 75-80% of its customer base (Cablevision is now at 71%), Comcast should continue to grow subs by low double digits in the near term and low single digits beyond the next 2-3 years.  Doing so, however, will pressure ARPU, as Comcast lowers price to pick off more resistant adopters.  To date, Comcast has maintained flat HSD ARPU, but Time Warner’s HSD ARPU slipped 2-3% yr/yr in Q3 07 and Comcast’s probably eventually will as well.  A near term revenue growth in the low double digits giving way to low single digit growth further out seems conservative.  So far, wireless HSD products (Clearwire) or broadband over power lines do not pose material risks to pricing or sub count, but there is some possibility they will in the future.
     
    Small-Medium Business (SME)
    Comcast expects this to be a $2.5 billion revenue business by 2011.  While we don’t have data to evaluate this claim, and management’s credibility on its own has been compromised, my own anecdotal observation is that the RBOC data and voice products to small businesses are significantly overpriced, about 2x the pricing for the same product to residences.  Cable should be able to move in under this pricing umbrella easily and still maintain the 50% margin they target.
     
    Online advertising
    Management claims they can add $1 billion in annual revenue by 2011 through interactive advertising to internet customers (search, interactive ads, display ads).  If so, it would probably be high margin, but they have not proven this concept yet and a conservative set of projections would not give them much credit for this.
     
    Total revenue growth
    Management claimed in early 07 they would grow revenue 12% per year 2007-2009.   They will do 10-11% 2007 and 8-9% Q4 07.  Add up everything I just said and you get 7% revenue growth CAGR through 2012. 
     
    EBITDA margins expanded over the last several years and management predicted (March 07) that they would continue to expand 2007 - 2009.  RBOC entry may inhibit price increases and will certainly drive higher marketing expenses.  Also, HSD’s rapid growth over the last several years shifted mix toward a product with much higher than corporate-level margins.  The growth driver over the next several years, telephony, may not offer comparably high margins.  All in, it seems safer to assume flat EBITDA margin or some margin compression than expansion.  If revenue grows at 7% per year through 2012 and margins compress by 300 basis points EBITDA would compound at 5% per year.
     
    Capex
    Comcast’s inability or unwillingness accurately to predict its own capital needs is now justly infamous.  There is a crucial difference, however, between capital prediction and capital allocation.  Listening to management capex predictions is obviously pointless.  However, that does not mean they have misallocated capital invested in the physical plant (including digital boxes in the home).  EBITDA, net of capex in 2007 will be approximately $5 billion.  Comcast’s net physical plant (the only asset they have to replace) at the beginning of the year was $26 billion (assuming “Other intangible assets” needs replacement).  A 19% pretax return on capital for a business that can be levered 4-5x EBITDA suggests capital invested in the plant is well spent.  Further to this point, Comcast compounded EBITDA/share at 11% per year 1997-2007; had they not delevered the company over that time period, the CAGR would have been 15%.  Examining increases in EBITDA for the last 3 years relative to capital spent would support a similar conclusion – when Comcast has invested in its own plant rather than acquisitions, its results are satisfactory. 
     
    Cablevision, which is approximately 2 years ahead of Comcast in penetrating its customer base with phone, HSD and digital (the last of which is the most capital intensive), saw a 16% absolute decline in its cable capex this year, to about $200 per basic sub.  This was driven largely by the fact that it reached a critical mass penetration of the capex-intensive digital product (Q4 06 was 78%).  Moreover, Cablevision’s capex decline came in the face of RBOC video rollout that already covers 23% of its footprint.  Comcast will spend about $250 per sub this year but get to a 78% digital penetration mid 2009, at which point they should start to get some relief from capital spending pressure.
     
    Overall on capex, there is a significant chance that it will not increase materially from the 2007 level of $6 billion and may even decrease, but given the company’s history and given that RBOC entry will also push capex spending higher, it seems wiser to assume continued capex increases, albeit at a slower rate than growth in EBITDA. 
     
    If capex simply grows 100-200 bps slower than the 5% CAGR we are assuming for EBITDA, free cash flow per share would grow at 6-7%.
     
    Conclusion
    If you’ve made it this far, I am, frankly, surprised.  I doubt any of the 3 people who visited my AET writeup last year made it to the end and I expect less interest in this idea. 
     
    Regardless, a final comment on timing.  While a long-term shareholder should do well from here, you may well get a chance to buy this business at a better price.  The housing downturn is obviously ongoing and will continue to pound their basic sub numbers for at least several quarters, as well as pressure their HSD adds lower.  DTV’s stepped-up promotion of its high def offering will make itself felt more in Q4 than Q3.  DISH had a rotten Q3 for net adds and can be counted on to return with a vengeance in Q4.  Moreover, the RBOCs will add video subs in Q4 at an increased rate relative to Q2 or Q3.  While capex should eventually conform to the assumptions mentioned above, the CFO Angelakis on a 12/07 conf call sounded like capex might actually increase materially in 2008. 
     
    More fuzzily, I do not think Comcast management has yet transitioned the company into the fighting machine it will eventually learn to be.  Despite much talk about how competitive the world is, they have enjoyed relatively benign duopoly/oligopoly status for years, in which the primary operational challenge was just to meet rapidly growing demand for utility-like essentials, not to market products and service customers in such a way as to win in a predatory competitive landscape.  Reading between the lines of Roberts on the last quarterly call, he basically admitted as much.  If you like this idea, buckle your seat belt.
     

    Catalyst

    Market realizes the above

    Messages


    SubjectQuestions!
    Entry01/07/2008 11:36 PM
    Memberdavid101
    Thistle,

    Thanks for posting this idea because I have questions :

    1. Pricing: I live in Comcast country and my neighbors love to complain about their cable bills, which range from about $80 up to $200 for all the bells and whistles (HDTV, broadband, premium channels), when the annual 6% price increase is announced. How much pricing power do they have left?

    2. Wireless - Verizon is setting up to one-up the triple play with the homerun play by having phone, broadband, cable and wireless. Do you think Comcast will eventually try to add wireless (take your pick of new build, acquisition, JV)?

    3. Internet - Do you view this as a potential threat to broadcast TV?

    4. Headquarters - How much have they spent on their new building in Philly?

    5. On the non-EBITDA generating assets, what are they? Are we talking the sports network or sports teams?

    6. Distributable Cash Flow - When you say it will trade a 7-8% yield on distributable cash flow, are you talking 2012's distributable cash flow over today's stock price?

    David

    Subjectreply
    Entry01/08/2008 10:29 AM
    Memberthistle933
    1. Pricing - As long as consumers want to watch proprietary sports programming, and more of it, the cost of which goes up meaningfully each year, they will have to accept price increases from their video providers. Note that satellite ARPU increases have been roughly 5-7% per year, not much different from cable. My guess is that average price per basic package continues to go up low single digits, with added features driving ARPU a bit higher than pricing increases.

    2. Wireless - There's no evidence yet that a quadruple play enhances the competitiveness of a provider relative to a triple play, which is probably one reason Comcast did not bid on the wireless spectrum the FCC is auctioning this month. If that evidence does materialize, Comcast would probably move toward adding a wireless product. I think this unlikely, however. Consumers don't want bundles. They want discounts. And Comcast does not need a wireless product to discount its product.

    3. Internet-based video content is both an opportunity and a threat. It will require more bandwidth, which Comcast can charge for. There is no sign yet that internet content reduces demand for traditional TV content. If it does begin to sap demand for the traditional product, and Comcast is not able to charge as much for internet-delivered bandwidth as the traditional product, this could be a problem, though I would think it would happen slowly. All the video providers would face this problem (satellite in particular), however, and so long as they all remained rational, would find a way to get a good return for providing video to consumers. My guess, though, is that internet content ends up being more additive to demand for traditionally delivered content than reducing it.

    4. Company headquarters - the corporate capex projection for 2007 was $250 million (vs $30 million 2006), and this included new hq and relocation costs.

    5. It's pretty well laid out in the 10K. Wireless spectrum, legacy TWX stock, non-consolidated content assets.

    Subjectvs DTV
    Entry01/08/2008 10:30 AM
    Memberalex981
    DTV was written up here a couple of weeks ago - it seems to be trading even a bit more cheaply, 5.7x 08 EBITDA, 5% FCF yield, almost no debt. Have you given any thought to how the two compare? As you mentioned, satellite is still generating net video adds, but on the other hand, cable is gaining in voice and HSD...

    Subjectsatellite
    Entry01/08/2008 01:13 PM
    Memberthistle933
    I suspect they are good investments here as well, though I haven't studied them as closely as cable. All things being equal, I would rather bet on Malone or Ergen than the Roberts to make me money, and Ergen before Malone. DISH, by the way, seems a bit cheaper to me than DTV, even if you pro forma the extra expenses they have to absorb now that SATS is no longer charging them at cost. But I haven't studied the valuation metrics on either DTV or DISH closely enough to be sure of that. Historically their EBITDA growth rates and returns on incremental capital have been materially higher than cable. I suspect that differential will narrow and perhaps disappear over the next few years, now that they have matured and since cable is still in the early stages of rolling out voice and the SME product.

    Malone claims satellite has a near term infrastructural advantage over cable because of capability to broadcast greater number of hi def channels. There may be some truth to that, but cable has tended to eliminate satellite product advantages over time and I doubt hi def will prove any different.

    Triple play (from either cable or RBOCs) essentially amounts to bundling discounted products with the video product, which discounts satellite can't offer. Triple play from cable is still relatively recent, while RBOC entry is on the come. Though DTV results didn't show it Q3 07, the housing downturn will presumably pressure their results eventually, as they already have for DISH (see decline in net adds for Q3 07). All in, there are stiff headwinds facing satellite that may or may not have made their impact felt yet. Notably, CVC said on last cc that they thought satellite was losing share across their footprint (where there are now two strong triple play players, cable and VZ). Another overall consideration with satellite vs. cable is that it is probably a bit higher risk, since cable is diversified across 3 products whereas satellite just has video. But I wouldn't make too much of that difference.


    SubjectRe: satellite
    Entry01/08/2008 02:01 PM
    Memberdoggy835
    "Malone claims satellite has a near term infrastructural advantage over cable because of capability to broadcast greater number of hi def channels."

    Satellite always has an advantage over cable for broadcast (i.e. number of channels). Cable always has an advantage over satellite for narrowcast (local channels, VOD, interactive, etc.). If you know which will be more important to customers the next few years you know which provider will have a tailwind. It's gone back and forth a couple times.

    SubjectEV calc
    Entry01/08/2008 03:08 PM
    Memberthistle933
    6.0x 08 EBITDA was total EV/Total EBITDA.

    Cable EBITDA 08 $12.93B (assumes 7% organic gwth and $290M for Insight)
    Corp o/h $430M,
    Content EBITDA of $357M
    Total EBITDA of $12.86B.

    Equity $52.2B
    - Other Assets $5B
    - Premium for Content Assets $1.2B (assumes EV/EBITDA value is about 3x higher than cable business)
    + Net Debt at yearend (pro forma for Insight acq) $76.59B
    Total EV = $76.59B

    SubjectIncorrect. Equity is 52, year
    Entry01/08/2008 11:41 PM
    Memberthistle933
    Incorrect. Equity is 52, yearend debt is 31. Subtract 5 for investments, 3.2 for content. Calculated this way, EV = 74.8.

    Given my assumption for 08 EBITDA for cable segment, and excl. content but fully allocating corp o/h to cable, 'cable EBITDA' = 12.6. Thus, EV/Cable EBITDA = 6.0x.


    Subjectvmed
    Entry01/10/2008 03:53 AM
    Membermichael55
    how do you compare comcast to vmed
    different country of course; no competitive threat from rboc in terms of new video offering, but lots of competition from sat and broadband wholesalers

    however that competition is nothing new, yet stock seems to have come in quite a bit

    interesting/smart shareholder list (huff, branson, franklin, srm etc etc

    i think the valuation and fcf numbers are better than comcast, and while uk housing prices are coming down, there was no subprime/overbuilding boom in the uk, like the us

    curious as to your thoughts; thanx

    SubjectI've only looked at cable outs
    Entry01/11/2008 12:43 PM
    Memberthistle933
    I've only looked at cable outside the US superficially in the past and never proceeded because the competitive and regulatory environment seemed so different.

    But I'm curious as to your view of FCF at VMED. On just a quick look, VMED has 4.3x Debt/EBITDA and at current price of $13.75, VMED looks to me about 6-6.5x EV/EBITDA. I see them producing about GBP 225-250 fcf in 08, which comes to about a 10% fcf yield, if I'm doing everything correctly. That does seem cheap - I just don't have a good feel for the EBITDA growth or future capex requirements there. Also, that fcf estimate was burdened by no taxes, which are 28% in UK and might mean current fcf is higher than a rate normalized for taxes.

    Subjectuk cable
    Entry01/15/2008 12:08 AM
    Membermichael55
    in general you are correct; my fcf yield is higher; but in the ball park with yours. on ebitda growth; its supposed to grow as they add internet and phone to customers (same triple or quadruple play concept as in the usa), also theres cost and cap ex savings due to the merger a while ago w telewest. however, honestly, thus far ebitda really hasnt grown that much, but like comcast in the future it is supposed too

    i think future cap ex should come down as theyve upgraded the plant etc etc

    also there are tons of nol's; so you dont need to worry about taxes in this lifetime

    SubjectTwo points to consider about t
    Entry01/16/2008 09:39 AM
    Memberthistle933
    Two points to consider about the RBOCs. As to their cap spend, the fibre network VZ installs lowers maintenance costs across their entire network, including subs who don't take video or voice from them. They include in their ROIC calculation those savings, as well as the 'saved' EBITDA from reduced attrition on their existing voice sub base.

    Also, correct me if I'm wrong, but I believe the VZ and T valuations you reference seem to be of the entire enterprises, including their wireless businesses, which grow more rapidly and are less capital intensive at this point, and therefore deserve higher multiples than the legacy wireline businesses. When I used comps to back out the value of the wireless pieces a few weeks ago (adjusting pro rata for VOD's ownership of VZ wireless), I got the wireline stubs trading around 4.5-5.5x EBITDA.

    SubjectRe: FIOS costs
    Entry01/16/2008 12:38 PM
    Memberdoggy835
    "...assuming that for $1500 per sub, VZ gets 20% penetration, they are effectively creating subs at $7,500 per sub ($1,500/.20) compared to cable's ~$3,000 per sub (or lower) valuation,"

    These numbers look way out of whack. VZ quotes gross capex of about $1000 per home passed plus 700 per connection. Some of the 1000 replaces planned capex for the existing copper plant, so net capex is more like 750 per home passed. Furthermore, video penetration may only be 20-25% but when you include data subscribers and so forth penetration rises to 35-40%. Based on 39% total penetration VZ calculates net capex of $2500 per sub. Add a few hundred for marketing and you're still below $3000 per sub.

    It's not at all clear to me cable has a big incumbency advantage. Most people still get voice from their telco and video from their cable MSO. People moving to triple play will either have to switch voice over to their cable MSO or switch video to their telco. It's not obvious to me people will favor one over the other, if anything telcos seem attract less customer hate than MSOs. Cable does have a head start, so maybe the market stabilizes around 60/40 instead of 50/50, but I'd be really surprised to see it break 80/20 long term.

    SubjectRe: FIOS costs
    Entry01/18/2008 03:11 PM
    Memberdoggy835
    "Cable also includes high penetration of data, so assuming data penetration per video sub is the same..."

    It's NOT the same. Data penetration per video sub exceeds 100% for FIOS because VZ gets lots of people who buy data and not video.

    Defining "sub" as a customer who gets one or more services, VZ penetration rate is 35-40%. They use 39% in their forecasts, yielding a $2500 investment per sub. Your 20% penetration number is simply not correct.

    "If you do $1,000 per home + 700 per connection, plus at least 300 in marketing spend (they spent over 500 in Keller TX) = 2,000 per sub on 20% penetration is 10,000 per sub."

    Even if your 20% penetration was correct, your math is still wrong. You do not divide the 700 per connection and 300 marketing spend by 20%. They're already in dollars per sub. Only your $1000 per home passed number should be divided by your 20% penetration rate.

    Your $7500-10000 per sub cost would only be correct if VZ penetration was around 10% vs. the 39% they claim.

    Subjectre doggy: Fios
    Entry01/18/2008 05:26 PM
    Membermark744
    700 per sub including marketing spend makes no sense (they spend 500 per sub in marketing keller, their big success story). the set top boxes alone are $300, then you have materials, labor costs, modems, etc. The $700 claim seems way way off base. Their claim that they plan on getting 39% penetration of homes passed also seems extremely aggressive to me. When I define penetration it is video sub per video home passed. Also, how can you get more than 100% penetration of data per Fios video sub passed? I know what the company is "claiming" but my issue is I don't simply don't believe these claims! (and I don't think the market does either given the ex-wireless valuations according to thistle).








    Subjectre doggy: fios
    Entry01/18/2008 05:36 PM
    Membermark744
    To clarify, I'm looking at the cost per gained Video sub, not for all their services (ie people who only take Fios data). My argument is that the cost to win a video sub only is much higher and my 20% number is what I believe are video subs divided by Fios homes passed. It seems that the cost to acquire a video sub is much higher vs. what you can already get by going long cable. Also, when you consider the EBITDA per sub, it is higher for cable because VZ's EBITDA margins at higher penetration rates are closer to 30%-35% as the programming is on less favorable terms. I also believe the EBITDA-maintenance capex per cable sub is higher vs. what VZ can get.

    SubjectRe: FIOS costs
    Entry01/22/2008 10:28 PM
    Memberdoggy835
    "I'm looking at the cost per gained Video sub, not for all their services (ie people who only take Fios data)."

    I understand this, I'm just saying it's wrong. What magical properties does a video-only customer posess which makes him worthy of being called a "sub" that a data-only customer lacks? Both produce monthly revenue. Video ARPU is higher but half that money goes to content providers. Data revenue stays "in-house".

    If VZ passes 100,000 homes in a town, gets 40k data subs of which half also sign up for video, why do you only count the 20k with video and ignore the other 20k? If I flipped your method around and divided Comcast's EV by data customers, excluding anyone who did not buy data, I'd probably get a similar $7500 "per data sub" valuation. What's the point? As for other issues:

    1. Basic settops cost under $100 in quantity.

    2. VZ's capex doesn't include settops, anyway. STBs are leased to the customer, with their own ROI calculation.

    3. You can't extrapolate Keller marketing spend. It was a brand new concept in a town too small to achieve marketing scale.

    4. I read VZ actual spend was coming in more like 850 per home passed and 900 per connection. This doesn't materially change the "per sub" results if you do the math right.

    Only time will tell if FIOS is a good investment. If VZ hits 39% penetration they'll do fine, even if some of those subs don't happen to get video. There's nothing "special" about video.

    Subjectre: doggy
    Entry01/23/2008 12:17 AM
    Membermark744
    Instead of going back and forth ad infinitum on this, you might want to take a look at a recent Sanford Bernstein report. What VZ spends per sub is higher vs. you said (around $1,500, according to Company published data and re-iterated in the report) and the report does a good analysis of looking at true costs per sub, looking at video only subs (and video vs. data) and the ROI over the life of the FiOs project. The conclusion is that the cost to build is at least $4,000-$5,000 per sub (or greater depending if you look at video only subs) under aggressive assumptions (basically Verizon's) and that even under the most optimistic case, enjoys returns below VZ's cost of capital. Also, most of CMCSA's data subs also take video, so you really have to look at the entire bundle.
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