Markets

Comcast: Buyback Comeback?

The nation's largest cable TV operator has announced a plan to repurchase $5 billion worth of its stock.

When all else fails, buy shares back. Having seen its shares fall 20% over the past year, Cable giant Comcast (symbol CMCSA) says it will do just that, announcing plans to buy back $5 billion worth of its stock. If Comcast follows through with the deal, it is "a major positive step" for the nation's largest cable TV operator, says Morgan Stanley analyst Richard Bilotti.

The buyback puts the Philadelphia-based company on equal footing with Time Warner and Viacom, which have launched repurchase programs of their own over the past two years. "We believe that the share repurchases should help Comcast narrow the gap between recent trading levels and its intrinsic value," says Bilotti.

Comcast comes off a tough fourth quarter. Costs from hurricane damage and a higher tax bill battered earnings, which fell 69% from the fourth quarter of 2004. Despite the decline, the company's high-speed Internet business grew and its phone business was steady.

Competition to send you a monthly bill for phone, Internet and cable television is fierce. Phone companies, such as Verizon and ATT (formerly SBC Communications), are launching TV service. Satellite television providers, such as DirecTV and Echostar, continue to nibble at cable's audience. To keep predators at bay, Comcast plans this year to offer packages of cable, Internet and phone service that give customers a discount if they buy the whole bundle.

Putting a fair price on cable companies is never an easy task. They spend a lot to build their networks, carry huge debt loads and generate large depreciation expenses. Instead of earnings, analysts tend to base their value estimates of cable operators on free cash flow -- what's left after the building and equipment expenses are paid. Bilotti expects about $2.5 billion in free cash flow in 2006 from Comcast, but he predicts that the rollout of bundled packages and other enhancements will limit cash-flow growth through 2007.

Although Bilotti has an "equal-weight," or neutral, rating on Comcast, his 12-month target price of $35 represents a significant potential gain from the stock's recent price of $27.

--Thomas Anderson

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