Ragas Report on Sat, 12 May 2001 02:03:33 +0200 (CEST)


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[Nettime-bold] THE RAGAS REPORT - Cable Stocks - The Kings of the Couch Potatoes


Title:

Knowledge Capital For Next Economy Architects
Editor: Matt Ragas
"Now read by over 25,000 next economy leaders"

In This Issue  
  Commentary: Cable Stocks - The Kings of the Couch Potatoes
More Knowledge Capital: Terra Lycos, Earthlink, Cisco and Microsoft
Quote of the Week: Sun's Scott McNealy Questions "The Bottom"
This Week's Commentary


Cable Stocks - The Kings of the Couch Potatoes

Digital cable. Video on demand. Cable telephony. High-speed Net access. Interactive programming guides and interactive TV.

Combine this bevy of next-generation services with reliable monthly cable TV subscriptions and one can see why Wall St. is head over heels for supposedly "recession proof" cable stocks in the very "unpredictable" current tech sector.

Now that many fast growing dot coms and Net software companies have imploded, the consistent 10-12 percent annual sales and cash flow growth of most cable operators look downright appealing. Words like "consistency" and "reliability" look quite attractive once again.

While most tech blue chips are still down 50-60 percent from their old highs, cable stocks have held up incredibly well during the NASDAQ meltdown. In fact, many large cable names are now trading near their 52-week highs.

So do cable stocks have further to run still or have they already run out of gas? For me at least, it's an interesting question that definitely begs further investigation.

Thus, I placed cable giants Comcast, Cox and Charter under my analytical microscope for the week to see what I could find out. Let's take a closer look.

Cox Communications [COX]

Atlanta based Cox Communications is currently the nation's fifth largest cable operator with over 6.2 million customers and is a majority owned subsidiary of media giant Cox Enterprises. After removing unusual items, Cox recently reported a first quarter loss of $125 million or $.21 cents per share, compared to earnings of $.30 cents during this same period last year.

Click Here to Learn How!While earnings declined for the quarter, Cox's operating cash flow jumped nicely 10% to $358 million in the quarter. First quarter pro forma sales rose 12% to $948 million during the period. In addition, Cox continues to capture additional revenue streams, with the cable operator adding 271,000 new digital cable, digital telephone or broadband cable subscribers during the quarter.

More importantly, Cox re-affirmed on its latest earnings conference call that it still expects to post 2001 revenue growth of 14-16 percent and operating cash flow growth of 12-13 percent for the year. At a recent price of $44 per share, though, Cox is already trading within only a few points of its current 52-week high. Cox shares need to dip further before I'd start looking closer.

Charter Communications [CHTR]

Formed through a series of frenzied deal making from Microsoft co-founder Paul Allen, Charter is now the fourth largest operator of cable systems in the U.S. With over 6.4 million customers, Charter now has customers in over four states. The company has been extremely aggressive in offering next-generation digital services.

Charter recently reported first quarter pro forma sales that rose 14% to $873 million with operating cash flow surging almost 10% to $388 million during the same period. Charter now expects to have 2 million digital cable customers and between 550,000-600,000 broadband cable customers by the end of 2001. Upon the close of some pending deals, Charter's customer base should grow to over 7 million in the next few months.

Much like Cox, Charter used its recent conference call to re-affirm its existing guidance for 2001. Operating cash flow is still expected to grow 12-14 percent with annual sales growth of 14-16 percent. Charter shares would look particularly attractive to me right now except for the fact that the company currently carries $13.7 billion still in long-term debt and that Paul Allen has not yet proven to be a savvy operator.

Comcast Corporation [CMCSK]

Unlike Cox and Charter, in addition to owning cable systems, Comcast is also the majority owner of electronic retailer QVC, a variety of cable TV channels and sports teams like the Philadelphia 76ers. On the cable side, Comcast is currently the third largest cable operator in the U.S. with over 8.4 million customers.

Earlier this week, the company reported impressive first quarter results with consolidated revenue growing 13% to nearly $2.2 billion and operating cash flow rising 9% to $640 million for the period. The cable side of Comcast continues to look strong with sales rising almost 9% during the period. Comcast now has over 1.5 million digital cable customers.

Comcast has also not backed off of its sales and earnings guidance for 2001. The firm expects to see revenue growth of between 10-12 percent for the year with operating cash flow rising 12-13 percent (up from previous guidance of 10-11 percent). While Comcast is already trading near its 52-week high at a recent price of $42, this looks like one well-run cable name with more room to run still.


Buy It Here!

More Knowledge Capital

 

TERRA LYCOS READY TO OPEN FORT KNOX: Note to struggling dot com executives looking for an exit strategy. Merger and acquisition rumors in portal land are back once again. A report surfaced on Thursday that Terra Lycos [TRLY], the Net giant formed by the merger of U.S. portal Lycos and Terra Networks of Spain last year, is looking to do some shopping.

With $2.2 billion in cash in its war chest, Terra Lycos obviously has a wide variety of acquisition possibilities available to it. However, Terra appears most interested right now in a buyout of either tech focused new media company CNET [CNET] or independent U.S. ISP Earthlink [ELNK]. A preliminary deal for either could be reached in the next few weeks.

Strategically, I think a purchase of Earthlink would make a lot more sense for Terra then a CNET deal, since Earthlink's subscription fees would significantly help broaden Terra's existing revenue streams. Right now, the majority of Terra's revenue still comes from the shaky world of online ad sales. However, it remains to be seen if Terra can really pull off an Earthlink purchase.

After all, with a $1.7 billion market cap, over $600 million in the bank and plans to be cash flow positive by Q4 of this year, Earthlink is still sitting in a decent bargaining position. In fact, I wouldn't be very surprised if other large players like Microsoft's MSN [MSFT] are snooping around at Earthlink again also.

Remember. Earthlink may now be stuck in a relatively slow growth business, but having 4.8 million credit card billing relationships is invaluable as everyone attempts to move towards subscription models. Just ask Bill Gates and his plans for Microsoft in a .NET world.


Street Side Investor

CLOUDY SKIES AND HIDDEN THUNDERSTORMS FOR CISCO: It's amazing how fast Cisco chief John Chambers has gone from hero to goat in the past year. Here was a guy that less than a year ago every business magazine wanted splashed on its cover. Now, with Cisco's stock in the tank, the media is suddenly fixated on what Chambers and Cisco "did wrong."

Of course, the reality is that Cisco did virtually everything right. The entire networking industry was suddenly knocked on the ground and beaten senseless. Everyone was mugged. Just ask Cisco rivals like Nortel [NT] and Lucent [LU]. At the same time, though, I still have trouble buying into the recent argument that networking stocks have bottomed. Show me the proof.

If anything, Cisco's third quarter conference call this past week makes me even more nervous of networker stocks. While Cisco managed to beat downward revised estimates for the quarter, it still didn't offer up any real long-term guidance for the next few quarters. These companies are still driving blind behind the wheel for the most part if you ask me.

Thus, while Cisco remains a great company, the stock's valuation still looks questionable. Based on current Wall St. estimates, Cisco still sports a pricey forward P/E of 65 and is actually expected to post a decline in sales for fiscal 2002. Yes, I know. Double ouch! Unfortunately, perception and reality have yet to re-align around Cisco yet.


Buy It Here!

MICROSOFT'S SUBSCRIPTION DREAMS TEMPORARILY STALLED: The software giant surprised investors this week when it announced that its forthcoming version of Office (called Office XP) would not be made available to U.S. customers on a subscription basis. The announcement contradicts earlier reports that Office XP would be the first real public unveiling of Microsoft's new .NET "software as a service" subscription strategy.

Most likely, Microsoft seems to have decided to make the sudden about face as a precautionary move. While subscription fees long-term amount to more a reliable and secure revenue stream, this transition is likely to negatively impact Microsoft's financials for the short term. So this move should help the software giant to not miss out on any U.S. upgrade revenue from Office XP.

Interestingly, Microsoft is still moving ahead with plans to offer the new Office XP on a subscription basis in New Zealand and Australia. Australian customers will have the option of paying for a one-year subscription of 48 percent of the cost of a regular upgrade from Office 2000. Of course, the customer would have to keep paying this subscription fee each year for continued use of the software.

The transition to "software as a service" won't happen overnight, but when it's done, I believe that Microsoft will be left sitting pretty in the driver's seat once again. You can love or hate Ballmer and Gates, but no one knows how to leverage their existing core assets as well as these two. The current beaten down tech environment is perfect for these two.

Quote of the Week


"People are claiming that they're seeing the bottom. I don't know where they're getting that data. They certainly didn't see the cliff, so how in the world can they see the bottom?"

-- Comments made this week by Sun chairman Scott McNealy regarding the tech sector's sudden willingness to believe that it's reached a bottom.



 
May 11, 2001






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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About Matthew W. Ragas: Ragas is President and Chief Analyst of Matthew Ragas & Associates, an Orlando, FL based strategic advisory and venture development firm. He was previously the founding editor of Raging Bull and is the author of the new e-business book Lessons >From the E-Front from Prima Publishing.


DISCLAIMER:
The RagasReport and Matthew Ragas and Associates, are not a registered Investment Adviser or a Broker/Dealer. Readers are advised that the report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The opinions and analyses included herein are based from sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied is made as to their accuracy, completeness or correctness. Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report should be independently verified with the companies mentioned. In addition, we receive no compensation of any kind from any companies that we mention in this report.



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