SIVY ON STOCKS from money.com
April 27, 2001

Waiting for the payoff

Cable television independent Comcast has a terrific franchise, but the
stock has gone nowhere. Now it looks ready to pay off.

By Michael Sivy

Sometimes businesses have great franchises and are well run, but you'd
never know it from the share price. Momentum investors would tell you to
dump such a stock because the market just doesn't like it. Not me. It can
sometimes take three or four years for a stock's price to catch up with its
fundamentals, and if you're really a long-term investor, you should be
willing to wait. As superstar investor Warren Buffett says, the stock
market transfers money from the active to the patient.

A perfect case in point is Comcast [CMCSK], the No. 3 cable television
company (after AT&T and AOL Time Warner, the owner of this website). I
recommended Comcast stock in December 1999 at $52 a share and over the next
five months it fell 40 percent to around $30 a share, at which point I
recommended it again. Now, at $44, I still like what I see.

There were several reasons for last year's decline. Most cable stocks
dropped in the initial phases of the Tech Wreck (although most of them
turned up long before other tech stocks did). Comcast also suffered after
reporting lower-than-expected earnings for last year's first quarter, in
part because of expenses associated with acquisitions. In addition, because
85 percent of the company's voting stock is held by insiders, the potential
for a takeover doesn't support the stock when it becomes undervalued.

Comcast's dealmaking may have hurt reported earnings last year, but it has
greatly enhanced the long-term value of the company's franchise. Through
strategic sales, purchases and swaps, Comcast has sharpened the focus of
its cable territories, which are centered on the greater Philadelphia
market. In addition, Comcast has aggressively upgraded its systems to use
the latest digital technology. Moreover, the company has valuable
investments in other businesses, including a 57 percent stake in the QVC
home-shopping network.

Over the past year, Wall Street analysts have become increasingly bullish
on Comcast's future, and two have recently upgraded the stock to a "strong
buy" in advance of the company's first-quarter earnings report expected on
May 8. The reason: Two important trends are bullish for the cable TV
industry as a whole, and Comcast is at the forefront of each.

First, cablers are poised to reap the benefits of technological
improvements, including digital video, interactive television, cable modems
and cable telephone service. Second, the industry will finish a series of
very expensive upgrades next year and will then enjoy several years of
lower capital spending. That means that the torrent of cash the cable TV
business generates will be available to companies to reduce debt, buy back
stock, raise dividends, make strategic acquisitions or otherwise increase
shareholder value.

At the current $44 share price, Comcast trades at 18 times next year's
estimated cash flow. That's a fair valuation and could look very cheap a
couple of years from now as Comcast cashes in on its first-rate technology
and enjoys soaring free cash flow.

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