US cable companies see future in business services

Fri Mar 26, 2010 4:09pm EDT

* Business services seen as low risk

* Business services seen as growth engine for cable

* Fast growth could change view of cable as value stock

By Yinka Adegoke

NEW YORK, March 26 (Reuters) - Stiffer competition from satellite, telephone and the Web, as well as a slowdown in new residential customers, has forced cable operators to turn to the small to mid-sized business sector for new growth.

Cable investors like the business of business services because of its low investment risk. A cable company does not have to spend billions of dollars in new capital to build the services since it uses an existing network for residential customers.

"Cable was late to the game, but they can be fast-followers and eventually future leaders," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management Group.

Jacobsen said that, with most of the larger cable companies now seen by investors as value stocks, business services could be a catalyst that creates an investment opportunity.

"If they can embrace the idea that they're growth companies, they could expand their multiples from value to growth," Jacobsen added.

Cable companies such as Comcast Corp (CMCSA.O) and Time Warner Cable Inc (TWC.N) are trading with an enterprise value around 5.8 to 6 times 2010 earnings before interest, taxes, depreciation and amortization, according to Thomson Reuters I/B/E/S.

This is only slightly better than the 5.25 times earnings of a traditional phone company such as Verizon Communications Inc (VZ.N). They compare poorly with the likes of Apple Inc (AAPL.O) and Google Inc (GOOG.O), which trade around 11 to 12 times earnings.

Taking advantage of a recovering U.S. economy could help cable companies trying to make inroads with small to mid-sized companies, said investors.

Privately held Cox Communications, the third largest U.S. cable company, gives some insight into the potential. Cox started working with business customers in the nineties, many years ahead of most of its counterparts.

It expects to rake in $1 billion in 2010 and to maintain annual growth in the mid-teens for the foreseeable future, according to Phil Meeks, senior vice president of Cox Business.

The Atlanta-based company, which earned $9 billion in total revenue last year, says 60 percent of its annual growth overall is generated by its business services unit.

Meeks said Cox won most of its early business customers in the 'small' end of the market -- those with less than 20 employees. It is now going after slightly larger businesses with 20 to 99 workers.

"We've been able to win customers by building products and services that were specific to their needs," Meeks said.

Comcast has taken a similar route and has rolled out new services to small business customers across its national network and expects to start targeting businesses with 20 to 250 employees.

Business sales at Comcast grew 48 percent to $828 million in 2009 and most investors expect it to easily top $1 billion this year.

"Competition has mainly been on price," said Bill Stemper, head of business services for Comcast. "We focus very much on the street sales force getting the products sets in place."

Beyond winning larger business customers for wired phone and Web services, the cable companies are looking further to wireless voice and data services in the near future as they roll out wireless technology. And there is the lucrative wholesale wireless backhaul business, which leases fiber optic cable to cellphone carriers to deliver data to towers. Cox sees a $2 billion opportunity in its market.

"The business market is a very profitable segment for the incumbent phone operators and they're going to fight hard to maintain share," said Chris Marangi, a portfolio manager with Gabelli & Co, which owns cable shares. "This is a high growth business compared with residential and with little of the rising programming expense of video which hurts profits." (Reporting by Yinka Adegoke; editing by Andre Grenon)

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article