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|  | AUGUST 23, 2004
By Olga Kharif Comcast: More Than Buffett Is Behind It The Sage of Omaha may not have actually made the call to buy 5 million of the cable giant's shares, but it may still be a good call In the past 30 years, Warren Buffett has made many smart investment decisions, multiplying his fortune and earning an adoring following. Whenever he buys a stock, millions of investors join in. Witness his recent grab of 8 million Pier 1 Imports (PIR ) shares, which sent that retailer's stock up 9%. Ditto when the Street learned on Aug. 17 that back in April, Buffett's Berkshire Hathaway (BRK.A ) had bought 5 million shares of Comcast (CMCSA ), the country's largest cable company. The stock jumped nearly 4%. Investors should have sensed that this investment was out of character for Buffett. The Oracle of Omaha has said he bought Coca-Cola (COKE ) because he drinks the stuff every day. He invested in Pier 1 because he says he likes shopping at its stores. A self-described technophobe, Buffett has stayed away from tech companies -- even during the dot-com boom -- because of their relative instability. When he has ventured into tech in the past -- for instance, investing in network provider Level-3 (LVLT ) in 2002 -- he tended to buy bonds, not shares. The 74-year-old Buffett, however, likely had nothing to do with the Comcast investment, made soon after the cable giant backed out of bidding for content powerhouse Walt Disney (DIS ). "Warren Buffett wouldn't make such a small purchase," says Mohnish Pabrai, managing partner of $140 million Pabrai Investment funds where Berkshire, which manages $36 billion in equity, is a holding. GOOD TIMING? Instead, the Comcast investment is more likely the brainchild of Louis Simpson, president and CEO of capital operations at Berkshire insurance subsidiary Geico, says Stephen Goddard, fund manager at the London Company of Virginia and a Berkshire shareholder. A long-time Comcast director, Simpson left its board days before Comcast's decision to bid for Disney earlier this year. He's familiar with the business as well as the broader telecom industry: Previously, he had also served on the board of AT&T (T ). Simpson didn't return several calls for comments. Though it may be a case of mistaken identity, investors who jumped into Comcast's shares on the news shouldn't feel too disappointed: Many money managers say now actually is a good time to do that, since Comcast hasn't quite recovered from its Disney bid. At $27.70, it's trading at 41 times 2005 earnings, vs. 44 times for smaller rival Cox (COX ). Its fair value is closer to mid- to high-$30s, figures Alex Vallecillo, senior portfolio manager with Armada funds, where he oversees $7 billion in investments and where Comcast is a long-time holding. "As far as cable companies go, I don't think you'd find a better-managed company," he says. What's more, now that Cox is considering going private, investors who want to have cable stocks in their portfolios might have fewer other options. PHONE CALLS AND FLIKS. Comcast's financial performance may also be ready to catapult to the next level. With its network upgrades completed, Comcast's capital spending should fall 20% this year, making 2004 the first year when the company reports positive free cash flow, of about $2.2 billion, estimates Tuna Amobi, an analyst with rating service Standard & Poor's in New York. Its cash flow will rise 32% next year, to $2.9 billion, as Comcast rolls out more advanced services, he figures. One such service is so-called voice over Internet protocol (VoIP), or phone service that uses lines connected to the Net. Comcast will roll out VoIP across most of its markets next year, aiming to offer it to 40 million households by 2006. The service could carry better than 40% margins, says Amobi. That would be as high -- or even higher -- than those for Comcast's cable operations. Another advanced service Comcast is offering is movies over broadband connections. Just ramping up, that market is poised to triple this year, to $2.4 billion worldwide, estimates Vamsi Sistla, an analyst with tech consultancy ABI Research in Oyster Bay, N.Y. Comcast is one of the first companies to allow its high-speed-cable Internet users to download and watch movies on their PCs. PRICE WAR? That and other spiffy services should help Comcast to keep its 21 million subscriber base steady, says Amobi, and to charge more. As a result, Comcast should enjoy explosive earnings growth, also helped by cost declines. Synergies from Comcast's 2001 acquisition of AT&T Broadband are just starting to kick in, and they'll generate $5 billion in savings over the next few years, figures Amobi. In 2005, Comcast's earnings per share are expected to nearly double, to 68 cents, as sales rise 8.3%, figure analysts polled by financial service Thomson Financial. The picture isn't entirely rosy: Price competition is intensifying as cable companies are going more head-to-head with telecoms and satellite-TV companies on all services. That's particularly true in broadband where, lately, digital subscriber line (DSL) service providers have been slashing rates and threatening Comcasts subscriber base and revenue growth. Investors also note: Simpson is no Buffett, with his stellar track record. Chances are, however, his bet is as good this time around.  Kharif is a reporter for BusinessWeek Online in Portland, Ore.
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