Comcast’s Struggle Underscores Cable Woes

NEW YORK The cable sector has long been considered a safe haven for entertainment and media investors.

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

So, has the “safe haven” 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. Others argue that the real threat to Comcast’s business momentum is heightened competitive pressure, 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 about Comcast.

He cited the troubled housing market as a key challenge: Fewer houses means a reduction in customers, and so does fewer people maintaining second homes. Overall, people have less discretionary cash as they struggle to pay mortgages and other key bills, and that cuts into their ability to pay for cable connections, he said.

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 at an investor conference. “When we see a little bit of a rise in both churn and bad debt, that indicates there’s an economic issue,” he said.

Media analyst and investor Hal Vogel suggested other cable firms have also felt the impact of 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 remains pretty much immune to economic pressures as most consumers will spend money on home entertainment rather than on traveling, going out and related activities.

“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 from telecommunications companies, such 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 agreed, adding: “Maybe Isiah Thomas can blame the weak housing market the next time the Knicks lose since it’s become the catchall 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 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 economic pressure on the cable sector even found its way into a couple of recent cable investor presentations.

As such, cable investors will likely keep their ears to the ground as the new year unfolds and talk of a possible U.S. recession continues.