Bearing down on cable

Critiques pile on sector's tough year

As if cable stocks haven't had enough of a bumpy ride as of late, cable analysts have made some more bearish stock calls this month.

Wedbush Morgan Securities analyst William Kidd last week initiated coverage of Paul Allen-controlled Charter Communications with a "sell" rating and a $2.50 price target.

"Charter cannot generate meaningful free cash flows" and it "offers little to no value to shareholders with its present capital structure," he argued. To further argue his point, Kidd highlighted that the company's negative free cash flow (FCF) of $892 million for 2006 was worse than the $696 million deficit booked in 2005.

"Our forecasts are not much better, as we are expecting negative FCF of $1.037 billion in 2007 and $785 million in 2008," Kidd said. "Therefore, in spite of its best efforts otherwise, we believe the company is eroding shareholder value in its current form and largely exists to service interest expense."

He also raised doubts that after years of attempted debt restructurings, the firm can find any solution to its high leverage and related challenges other than a sale of the entire company.

Pali Research analyst Richard Greenfield this week cut his rating on smaller operator Mediacom Communications back to "sell" with a $5.50 price target.

He had downgraded the stock to that status in January amid a retransmission battle with Sinclair Broadcasting.

"We gave up on our short thesis in mid-June as investors appeared more focused on the upside from a potential takeover of Mediacom rather than its continued underperformance (relative to its cable industry peers)," he said in explaining a summer upgrade to "neutral."

But Greenfield now feels that upgrade was a mistake as shortly thereafter the global credit crunch happened, "dashing hopes of any acquisition of Mediacom."

Plus, the whole cable sector reported weaker-than-expected second-quarter earnings, and Mediacom on top of that is underperforming its own expectations for 2007, Greenfield believes.

At least cable giant Comcast got a good Street review last week. Goldman Sachs analyst Anthony Noto lowered his 2007-09 estimates due to video competition and cut his price target by $5 to $29. But he also called the stock "attractive" at current prices, maintaining his "buy" rating. That provides 20% upside for the rest of 2007, Noto said.
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