Talk about influence. After Merrill Lynch analyst Jessica Reif Cohen raised her 12-month price objective on Comcast from $47 to $57 on Jan. 12, shares—already near yearly highs—climbed 5% in five days. Her report was particularly bullish on Comcast’s new push into the small and medium-size enterprise (SME) market, projecting commercial revenue to balloon from $250 million last year to $2.6 billion by ’11. We thought the timing was perfect to ask about her top pick for ’07.
I guess we know your No. 1 pick among the MSOs.
Jessica Reif Cohen: Obviously, it’s Comcast. We think there’s still very significant upside for Comcast and believe that 2007 share price performance can be maybe as strong as ’06, [which] was a fantastic comeback year. The fundamentals are very strong. Coming into ’06, I think the pendulum had swung too far to the downside. So there was good multiple expansion throughout ’06 from just under 7 times [EBITDA] to roughly 10 at year-end, and in our view these stocks should trade at least at these levels in year-end ’07, if not higher, given the solid growth characteristics, very strong competitive position and potential for new markets.
And the key growth drivers are small businesses and voice services?
Reif Cohen: For the industry it’s triple play plus SME, and VOD is just additive. For Comcast specifically, they just began scaling up for voice in the third quarter of ’06, so there’s at least three to five years of very strong growth just from the power of the triple play. Plus, we expect them to start to target SMEs in the second half of ’07, plus VOD, and what we have not factored into our numbers is any potential for interactive advertising, which we believe they’re well suited to do.
Are you expecting significant growth in interactive advertising?
Reif Cohen: It’s very hard to say how big it could be, but it would have been equally hard for anyone who covers the Internet to say Google would be the size it is today. The advertisers clearly want to reach target audiences, and this is an enabler. There are certain types of advertisers who need a mass audience—whether it’s retailers or movie companies or drug companies—but some advertisers need to reach a very targeted audience. Everything else is wasted. There may be privacy issues, and I think there are ways to get around them, but cable has a very robust infrastructure with two-way capabilities. I’ve seen claims by some of the telephone companies that [advertising] is their plan as well, but I would argue that they are inexperienced, at best. Comcast has taken a long time to build up its advertising sales force under Charlie Thurston. And they’ve done a great job, but they’ve done it very, very carefully.
So you see Comcast, specifically, as better positioned to exploit its new markets than it is threatened by the telcos competing on its turf?
Reif Cohen: I absolutely believe that. If you take Verizon at face value—maybe it’s not fair, but the history of what the telco companies claim that they’ll do versus what they actually did differ greatly. Maybe we’re a little bit too skeptical about it, and maybe this time it will be real, and you never want to ignore competition. But let’s say they do what they say what they’ll do. Comcast overlaps Verizon by about one-third of their footprint, probably. Verizon has said they’re going to have 15 million homes built for triple play—video, voice and data—in five years. So if they get 20% [of those 15 million homes], that’s 3 million subs, and a third of that is 1 million, of which maybe a third would come from satellite. So you’re talking about—if they do everything they say they will—targeting 600,000 or 700,000 Comcast subs in five years compared to what Comcast has the potential to do in that time period with telephone—video, voice and data.
And you’re very bullish on its SME push?
Reif Cohen: I think there’s an enormous opportunity, within or very close to their network. And with some investment they can build out their network and reach vastly more businesses.
Is the opportunity principally telephone and broadband services?
Reif Cohen: It’s broadband and voice, but it could be video as well. Look, it’s a step in a different direction for the cable companies. Customer service has to be much better. Quality of service has to be much better. But Comcast, for sure, is very aware of that. Cablevision has done a good job. Cox has done a good job.
What are the key obstacles to the growth you project?
Reif Cohen: There’s no question it’s a different kind of a customer. But I think they’re beefing up [their capabilities]. Comcast last year hired somewhere between 5,000 and 6,000 employees for voice, and I think they’ll do the same this year. They’re very, very focused on customer service. They’ve changed as a company. As they’ve grown, they’ve changed a lot and have moved up several notches. Their government relations are very strong. [EVP Comcast Corp.] David Cohen is probably the most under-recognized person in the cable industry, which means he’s done a great job, because he’s very much behind the scenes. It’s very different than when TCI was the dominant company. The relationship with Congress and the regulators is very different now. Their quality of service, their quality of marketing, has improved vastly.
What’s your opinion of the Time Warner Cable stock that’s about to start trading on its own?
Reif Cohen: Because it’s [only trading] “when issued,” we can’t offer an opinion on Time Warner Cable, but we recently raised our price target for Time Warner from $23 to $27, and nearly all of the change was our view of the cable company. We’re according it a 10 and a half target multiple [of EBITDA]. Time Warner has a little more heavy lifting to do [in integrating the Adelphia acquisition] than Comcast, but they have a strong upside as well.
Disclosure: Merrill Lynch does investment banking, securities and other business with Comcast, and Jessica Reif Cohen and/or members of her analysis team or their families own Comcast securities.
Rob Garretson is a business and technology writer based in Gaithersburg, Md.