Friday's Wall Street Journal carried a piece by its minority-owned analyst's shop, breakingviews.com. This particular piece involved the assessment of market valuations of cable companies versus those of ATT and Verizon.
Specifically, Robert Cyran and Lauren Silva argued that,
"The phone companies furthest along in their rollouts are pummeling cable groups. Shares of Verizon and AT&T both rose more than 15% in 2007, while shares in Comcast and Charter Communications have fallen 35% and 62%, respectively. This trend isn't over.
Cablevision and Comcast increased their capital-spending plans last quarter. However, the average cable company has a prodigious amount of debt. In the short term, it could be difficult for them to take on much more in order to build better networks. Despite all this, the average cable stock trades at a 30% premium to the big telephone companies, based on estimated 2008 earnings before interest, taxes, depreciation and amortization. This doesn't look right. Cable companies may be overvalued or phone companies undervalued -- either way they should converge over time. Playing that trend again in 2008 is likely to reward investors."
Whenever I read people quibbling or arguing over valuations, a red flag goes up. In this case, note the use of the word 'estimated 2008 earnings.'
Whose estimates?
Essentially, Cyran and Silva complain that cable stocks are probably 30% overvalued (from their prose earlier in the piece), but that, either way, they should converge to a similar multiple as that of ATT and Verizon. Oh, and, by the way, according to the article's numbers, cable is still 'overvalued,' despite a 2007 decline of as much as 60% or 30% in value among selected cable equities.
Maybe I'm wrong, but didn't I read articles in the Journal over the last year concerning Verizon's difficulties in stringing fiber through every town and hamlet? That local regulatory fiefdoms were holding it up for special deals and payments? That it's not the cost or technical aspect of running fiber, per se, that dogs Verizon, but, to put it bluntly, the extortion money the company must pay to every little 'burb that it wants to serve with fiber-optic.
Perhaps, as the piece alleges,
"Installing fiber may be costly, but it enables the phone companies to leapfrog their cable rivals. While expensive to install, fiber is cheaper to operate because many repairs can be done off-site. Verizon claims a saving of around $900 a customer a year. More important, a fiber connection to the home offers a faster Internet service than the cable companies serve up."
But if the local regulatory/payoff issue hasn't been resolved for the long term, I think that could go a long way toward explaining the valuation differences. Cable has been a community staple for decades. It doesn't have to negotiate for access anymore, if it ever did. Maybe that's why the article stated,
"Verizon and AT&T both offer the so-called triple play: phone, television and Internet service. While the big cable guys have about 10 million customers for their phone service, the phone companies are just getting started in video. AT&T has around 250,000 customers and Verizon about one million."
Clearly, the phone companies have a long way to go to reach the same numbers in high-speed access as cable currently has in telephone. Even my father recently switched his telephone to his cable provider.
Additionally, as I recall, DSL is more susceptible to local traffic congestion, by virtue of its loop technology, than is high-speed cable.
It just seems to me that Cyran and Silva paint an incomplete picture of the various bases of competition and consumer choice for high-speed access. The fundamental regulatory and technical aspects of cable and telephony are still quite different.
Might not that, alone, account for valuation differences?
Monday, January 07, 2008
Subscribe to:
Post Comments (Atom)
2 comments:
Again,sorry for being OT, but there are two news items that I'm sure that you saaw.
First,Sallie Mae hired Tony T to be their chairman. He ran Capital Markets when I was there back in the early '80s. He assemebled a great team.
But the execution was not always optimal.
I recall that he made it a point to have breakfast in the employee cafeteria (not the exec dining room) with a very junior person each morning. Part of the reason he did that was to be seen having breakfast with a junior person.
The other news item was this incredible admission by Moody's that they can't measure or track risk anymore!
Reuters Article
Nearly 3 decades at Chase (under Tony T's leadership) there was a concept called 'if-what' as opposed to the 'what-if' anlyses used by Moody's.
Under 'if-what', we had to identify the conditions under which a transaction would lose money. We would then assign probabilities to those conditions.
If we couldn't identify all the conditions, we didn't execute the transaction.
This was much harder than Monte Carlo simulation of a few dozen variables.
Alas, for that reason it was dropped.
Always enjoy your writing. Best Wishes for the New Year!
Thanks for your comment and compliment.
Regarding Terraciano, I found him, both from the results of his work at Chase, and in-person meetings, to be much, much more style than substance.
I may write something on the occasion of his (misguided) choice of him to head Sallie Mae, but I don't want to appear totally negative.
Suffice to say, he did some real, long-term damage at Chase, and only succeeded in cutting expenses and selling the company at his subsequent employers- from First Fidelity to Riggs.
-CN
Post a Comment