Craig Moffett is the senior analyst for U.S. Telecommunications, Cable and Satellite at Sanford Bernstein. He's also a "jester" and an "idiot" -- if you believe blog and message board authors ruffled by his take on
FiOS broadband service.
New York Times
article recently noted, Moffett has argued that the capital involved in Verizon's rollout of FiOS could be a gigantic bet -- with little hope for a meaningful return. While the service is loved by consumers, Moffett said it may not be great for Verizon investors.
Needless to say, champions of the broadband strategy were up in arms with his analysis. "I saw all of those same blog posts," Moffett says. "I was joking that two-thirds of those posts amounted to 'Craig Moffett is an idiot because FiOS is such a good product.' I don't disagree it's a really good product. It
a really good product. But is it a
Much of the venom aimed at Moffett comes from the view that he's really a cable analyst who is biased against telcos. After all, he has been the cable and satellite analyst for Bernstein since 2002, earning the top analyst spot of the Institutional Investors' All-American-Research Poll in 2006 and 2007. It was only last year that he added coverage of the telecom sector and, despite consulting to Verizon for 10 years, he's branded by many as a telecom newbie.
" I was a telecom guy for 15 years before I even looked at cable," he says. " I still think of myself as the telecom guy that also happens to cover the cable stocks. Not the other way around."
Moffett says that even Verizon believes he's biased. "Verizon will tell anybody that will listen that 'Craig Moffett is just the cable guy. He has a tremendous bias so you really shouldn't listen.' If I happened to say that I thought what Verizon was doing was brilliant, they wouldn't be saying anything."
True enough. Verizon Senior Vice President of Media Relations Eric Rabe told
that Moffett's analysis is based on a series of "questionable assumptions" and he seems aimed only at "pumping up cable stocks at the expense of Verizon."
"Mr. Moffett only started covering telecom a year ago," Rabe wrote in an email. "For many years he has been a cable analyst. Over the last six months or a year, Mr. Moffett has been an unapologetic supporter of our competitors and has spent no small effort denigrating us and our business plan at every opportunity."
"Verizon, I don't think, wants to talk to me anymore," Moffett says.
Throw Away the War Analogies
Moffett isn't one to hold his punches, and his sincere and frank approach has made him a favorite source for media members. By being completely open about his biases and beliefs, Moffett may not make the companies he covers happy, but he has become the telecom analyst voice that has the ear of many investors.
"I will be totally up front about what my biases are," he says. "My view of the market is overwhelmingly shaped by the fundamental microeconomics of the businesses on fundamental and structural competitive dynamics."
What disturbs Moffett is how often his views are quoted in pieces that cast the telcos and cable operators as "going to war." Frequently, these analogies have been used in reference to Verizon's FiOS move into to
Time Warner Cable's
stomping ground of New York City, which Moffett describes as a "side show."
"I understand how people love to talk about this stuff, and how there is a tremendous love of war analogies," he says. "But right now, less than 10% of the population has access to video from their telephone company. It's probably the case that 75% of this country hasn't even heard of the notion that telephone companies are even thinking of getting into the video market."
Judging from the responses to his analysis of FiOS, not everyone agrees. Still, Moffett boils the issue down to basic competitive dynamics, arguing that cable operators already have a leg up on Verizon and other phone companies, because the cable networks are already delivering voice, Internet, and video.
Given that Verizon is paying a hefty price tag to build out FiOS in only half of its footprint, the company is already at a disadvantage, he says.
Moffett doesn't solely measure FiOS up to its cable competition, though. When Verizon's FiOS rollout is matched up against
U-verse product, he finds Verizon is already at a handicap to its rival, too.
"The cost of the two services aren't all that dissimilar in the cost to connect. The difference is in the cost to pass," he says. "Verizon is doing a very labor-intensive and capital-intensive passing model that involves running fiber up and down every street, avenue and cul de sac. AT&T is simply saying they will bring fiber out closer to the neighborhood, but they aren't going to run fiber up and down every street. The cost of the network infrastructure itself is much, much lower on the AT&T side."
AT&T in a Dollar Rebound
Given his views on Verizon's strategy and his contentious relationship with the company, it should come as no surprise that AT&T is Moffett's best bet among telecom names. Aside from being reasonably cheap on 2009 earnings and offering a very attractive free cash flow yield, Moffett says AT&T is a good defensive bet for the second half of the year given the action of the dollar.
"Like a lot of supposedly defensive stocks that are U.S. dollar exposed,
AT&T underperformed in the first half," he says. "The purely dollar stocks, like AT&T and cable stocks, are likely getting some benefit from the renewed strength of the U.S. dollar. Most people don't think of these stocks as being affected one way or the other by the dollar-rebound story. But because they are purely domestic, it makes them dollar-rebound stories."
Moffett adds that with a bounce in the dollar, and with inflation heating up in the U.S., it's not unreasonable to believe that portfolio managers will begin moderating their exposure to non-dollar denominated revenues. That could bode well for AT&T - and its shareholders.
Moffett has rated both AT&T and Verizon as market perform since he assumed coverage in Oct. 2007, although he upgraded AT&T to outperform in June. During that time, shares of Verizon have dropped 20% and have forced Moffett to cut his price target to $37 from $44. During the same time span, AT&T shares have fallen 23% while Moffett has trimmed his price target to $42 from $47.
Moffett's take on those two companis isn't to say he's down on
like many analysts are. But Moffett believes the market keeps pricing in the embattled wireless provider's recovery well before it happens. "The risk/reward in the stock doesn't look all that compelling," he says.
Another source of concern is the uncertainty surrounding the future of the company's Nextel network, which the company acquired in 2005 but has had difficulties integrating. "There's an awful lot of uncertainty about whether they can find a buyer, and whether they can find a buyer at an adequate price," Moffett says. "I don't doubt that they will be able to find parties that are willing to bid. The question is are they are able to find parties that are willing to bid enough money that it makes it feasible for Sprint to part with the Nextel network."
Now that the Dolans are taking the steps to realize
shareholder value by exploring a spinoff or dividend payment, Moffett says the best pick in the cable sector is Time Warner Cable. The major attraction to the stock, Moffett says, is that it will pay a one-time special dividend of $10.27 at the end of this year.
"Time Warner Cable seems like a no-brainer," he says. "Once it goes ex-dividend, it leaves it with a much more attractive capital structure.
There is a true one share, one vote public ownership structure. It's a near slam dunk for
Best of all, Moffett says, is that Time Warner's stock is trading at "a huge and irrational discount" to
and the rest of the cable industry. He has maintained a rating of outperform for Time Warner Cable back to early 2007, although his current price target of $42 is nearly 60% above where the stock trades now.
Of course, Moffett hasn't called them all correctly. But as an analyst with public views, it's part of the business. "For better or for worse, what I do I have to do publicly. It's pretty clear to everyone when I've missed one," he says. "It's not like when I miss a call it's a secret to anybody. Being upfront and admitting it doesn't exactly take a lot of bravery. It's patently obvious."
Moffett says that his misses come when his fundamental microeconomics of the businesses fails. "My worst calls have been where my focus on structural economics and structural dynamics left blind spots for other things that are important," he says.
A good example is how he has "consistently underestimated" the quality of
and its strength with customers by virtue of "exceptional customer service and an exceptionally high-quality product."
"The worst you could say about DirecTV is that it may be over-loved," he says. "It certainly seems to be the consensus pick within the sector, arguably for a good reason. It's a well-run company with a very good product, and it's been taking share in gulps from
Moffett has altered his rating on DirecTV several times since late 2005, with the latest change coming in April when he downgraded the stock to market perform from outperform. The stock has added 11% since then, although at $28.21 it remains below his $35 price target.
Moffett says he was slow on the uptake and that he downgraded DirecTV far too soon. "I have consistently underestimated the mileage it can get out of what is, at the end of the day, a very high quality product," he adds. "Structurally, the satellite guys are rife with problems. But that shouldn't take anything away from the fact that DirecTV is a real class act in terms of the quality of its management and the quality of its service."