2007 Cable and Satellite Roundup: Beware of Lower Gains

Includes: CMCSA, CVC, DISH, T
by: Todd Mitchell

Gains for cable and satellite stocks should be lower in 2007. Cable and satellite stocks rose an average of 73% in 2006, outperforming the S&P 500 by 535%. We believe that industry trends will remain favorable in 2007 and that further upside may be possible with a supportive market, but gains are likely to be of a much lower magnitude. We have completed a review of the group and are pushing our price targets out to 2007 year end:

  • Cablevision (NYSE:CVC): price target raised to $30 from $28, HOLD rating unchanged, risk level speculative. We don't believe a competitive bid will emerge for Cablevision's cable assets in the near term and we don't see anyone clamoring to buy Rainbow other than DirecTV/Liberty Media. We think Cablevision will face greater competitive pressure from Verizon in 2007 and fundamentals could falter.
  • Comcast (NASDAQ:CMCSA): price target raised to $49 from $43, BUY rating unchanged, risk level low. We expect Comcast to report stronger-than-expected 4Q06 results and issue 2007 guidance for revenue growth in the 12% range, EBITDA gains of 14% to 15% and FCF gains of 25% to 30%. Among these four stocks, Comcast is our favorite with the clearest path to further upside in 2007 and the lowest downside risk.
  • DirecTV (DTV): price target raised to $26 from $24, HOLD rating unchanged, risk level speculative. We do not believe DirecTV is executing as well as it needs to keep its competitive position. Churn remains too high, new product launches are behind schedule and it has lost share to EchoStar. We think further upside at this point is based on speculation of a reworking of the capital structure and/or an eventual strategic play.
  • EchoStar (NASDAQ:DISH): price target raised to $44 from $39, HOLD rating unchanged, risk level medium. EchoStar exhibited a steadily accelerating momentum in 2006. It has a very compelling consumer offering and we believe executing better than DirecTV. EchoStar's stock has underperformed its peers and the company is the least expensive based on fundamentals.
  • Higher targets reflect a 2007 year-end target valuation. Previously, we worked off 2006. We value the cable and satellite companies based on the NPV of future cash flows. Specifically, we use a DCF model of future unlevered free cash flow, both aggregate UFCF, and UFCF per DBS sub, or cable RGU, aggregated up to the entire sub base. Our DCF employs a 2010 terminal year and discounts unlevered free cash flow [UFCF] back to present at a calculated cost of capital that is based on each company's financial profile. We also consider EBITDA, P/E and FCF multiples, as well as per-sub and per-RGU values.