Cable's house on shaky ground

Comcast cites troubled real estate sector in sluggish second half

The cable sector is an investor safe haven. Or so goes an old media and entertainment industry investor saying.

Nonetheless, few questioned industry giant Comcast when it came out in early December and lowered its 2007 financial guidance, arguing that a sluggish U.S. economy has been a factor dragging down its business performance in the second half.

So has the adage run its course, or is Comcast overstating the economic impact on its financials?

So far, Wall Street is somewhat divided on the issue. Many argue that Comcast has become so big that it is exposed to the U.S. economy while other cable operators remain shielded from it.

But some believe that all cable firms have become more exposed to the economy. Others argue that the real threat to Comcast's business momentum is competitive pressure of new proportions, which industry folks must still learn to fully understand and get a grip on, and the economy simply serves as an excuse.

"They are so big that they are a proxy for the economy," Kaufman Bros. analyst Todd Mitchell said of Comcast.

He cites this year's troubled housing market as a key challenge. Fewer houses being built means a reduction in customers, and so does fewer people maintaining second houses, he said. Overall, people have less discretionary money because they have to pay mortgages, and that can at least cut into their ability to pay for a second cable connection.

So Comcast is more vulnerable to a bad economy because it is so big, especially compared to regional companies like Cablevision Systems, which focuses on the New York area, Mitchell said.

Comcast co-CFO Michael Angelakis recently made the same argument, telling an investor conference that Comcast's scale across the U.S. means it has been stung by the downturn in the housing market and the sluggish economy. "When we see a little bit of a rise in both churn and bad debt, that indicates there's an economic issue," he said.

Longtime media analyst and investor Hal Vogel suggested other cable firms also have become more affected by macro-economic issues. "It used to be, 'People would rather starve than give up cable.' But not anymore," he said. "If you can't make your mortgage payment or rent payment, you're not able to make the cable payment."

But others think even the country's largest cable firm Comcast still is pretty much immune to economic pressures as most people — except for the financially weakest — will spend money on being entertained at home rather than on traveling, going out and the like.

"While many investors may blame Comcast's shortfall this year on the economy, we believe the vast majority of the reductions are due to competition," especially by such telecommunications companies, as Verizon and AT&T, Pali Research analyst Richard Greenfield said. "Comcast simply did not expect the level of competitive marketing spend that has occurred this year."

Corporate bond research firm Gimme Credit analyst Shelly Lombard concurs, saying, "Maybe Isaiah Thomas can blame the weak housing market the next time the (New York) Knicks lose since it's become the catch-all excuse for everyone's poor results, no matter the industry."

The analyst shrugged off the economic excuse, arguing: "We understand how a slow economy might make customers less likely to upgrade cable packages or buy extra services like VOD. But using the housing market as a rationale for losing customers is more of a stretch. Cable operators never mentioned housing as a driver of past revenue growth" when the housing market was strong.

Overall, most on Wall Street are more wary about the competition from satellite TV and telecom operators than about the economy's effect on cable companies.

Greenfield titled a recent report on Comcast "The War Intensifies." In it, he recommended, "Comcast needs to go on the offensive, and soon."

But the new talk of and questions about economic pressures on the cable sector even found their way into a couple of recent cable investor presentations.

As such, cable investors likely will want to keep their ears to the ground as the new year unfolds and talk of a possible U.S. recession continues. Maybe the coming quarters will bring clarity on how real and significant any economic impact on the cable industry's growth and outlook really is.