Comcast Corp has been hoarding cash to better manage its balance sheet but investors worry that it could be building a war chest for a splashy acquisition similar to its failed 2004 bid for Walt Disney Co.

Investors value shares of Comcast at close to historical lows, as the top U.S. cable service provider's conservative balance sheet strategy has rekindled speculation that it wants to be a major player in the media content market.

When I talk to other investors, it's usually the first thing they ask about, said Chris Marangi, an analyst at Gabelli Co, which is long-term shareholder of Comcast. They always bring up the 2004 bid Comcast made for Disney.

Comcast Chief Executive Brian Roberts made an audacious $54 billion bid for Disney five years ago, and the once traditional, family-run cable company has never quite shaken off the image of a media wannabe.

Investors worry that Comcast might use growing cash reserves to go after names such as Viacom Inc, owner of MTV Networks and Paramount film studio, or Time Warner Inc, which owns CNN, HBO and Warner Bros despite little evidence of such a move, said analysts. Disney is no longer seen as a target.

They say such concerns are behind the 11 percent drop in Comcast's stock this year because not many big media deals have a history of boosting shareholder value. In comparison, the S&P 500 Index has risen 12 percent in the year to date.

There is a wariness with investors about what Comcast is going to do, said Tuna Amobi, an analyst at Standard & Poor's.

On the face of it, a large bid for content seems unlikely given the slimmed-down trend in media. Time Warner this year spun off its cable service unit, purportedly killing the myth that content and distribution need to be combined.

Yet even the executive who fended off the Disney bid still thinks Comcast could buy a big content play. In an interview with Broadcasting & Cable magazine last week, former Disney CEO Michael Eisner said of Comcast: They may want to recapture their dreams of going after Disney, but not with Disney specifically.

I am sure Brian Roberts and Steve Burke (COO) have Time Warner high on their computer screens.

Eisner added that he had zero information on such a deal but it was enough evidence for some investors.

As Collins Stewart analyst Thomas Eagan said: With Comcast, the concern for acquisition risk doesn't have to be logical.

Comcast declined to comment on its M&A strategy. The company is still more widely expected to be interested in smaller cable networks acquisitions than a mega-merger.

FREE CASH FLOW GROWTH

Analysts said uncertainty surrounding Comcast's M&A strategy coupled with an earlier decision to slow the rate at which it returns cash to investors have hurt its valuation.

Comcast's enterprise value is just 4.9 times the average Wall Street forecast for 2010 earnings before interest, tax, depreciation and amortization (EBITDA). Traditionally, Comcast has traded at a ratio of about six to eight times.

To be sure, most pay-TV valuations are currently under pressure. The No. 2 cable operator Time Warner Cable is trading at 5.1 times 2010 earnings while satellite TV operator DirecTV Group is even lower at 4.6 times.

But Comcast is the only one of its peers whose investors consistently raise concerns about its M&A strategy.

For its cheerleaders, Comcast is still about rising revenue, growing profits and widening margins. It is a defensive play during a recession when Americans are still paying for cable television. Its capital spending is falling, leading to fast-growing free-cash flow.

Most analysts think Comcast should use that free cash to accelerate significantly a share buyback, or increase meaningfully its dividend.

Comcast has left investors confused about what they're going to do with all this free cash flow, said cable industry veteran analyst Craig Moffett of Bernstein Research. They should be clear and simply return it to shareholders and focus on being a cable company.

In 2008, Comcast's free-cash flow grew 56 percent to $3.7 billion, but it raised its already modest dividend by just $60 million leaving it with yield of 1.8 percent versus the average S&P 500 yield of around 3 percent.

Comcast has taken actions that might reassure investors. It resumed its share buyback in the second quarter after suspending it last year when credit markets looked rocky. Bernstein estimates the repurchases implied an effective yield of around 4 percent. The company still had $3.9 billion left on its pre-approved program as of June 30.

It's a blocking and tackling slow moving business. There's no Eureka here, said Kaufman Bros analyst Todd Mitchell.

(Reporting by Yinka Adegoke; Editing by Tiffany Wu and Richard Chang)

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