With Comcast, Look Beyond The Static

5/14/2012


  Recent Price
$29
  Dividend
$0.65
  Yield
2.2%
  P/E Ratio
18
  Shares (millions)
2,744
  Long-Term Debt as % of Capital
37%
  52-Week Price Range
$30.88 - $19.19

When they hear the name Comcast ($29; CMCSa), most investors think cable TV. And video is still Comcast's largest business. But in the 12 months ended March, cable-TV service generated just 35% of company sales, and video revenue rose only 1%.

In contrast, revenue from broadband internet rose 10% during the 12-month period, while NBCUniversal managed 9% growth, helped by Super Bowl advertising and two strong movie releases. Business services, still a tiny unit at 3% of total revenue, saw sales jump 39%. Going forward, operations other than cable TV should account for an even higher portion of Comcast's revenue and most of its growth. Comcast is a Long-Term Buy.

Comcast's strong picture

Cable TV faces fierce headwinds, most notably rising programming costs and competition from telephone and satellite companies, as well as online offerings. But these challenges shouldn't scare investors away.

Monthly average revenue per video user topped $143 at the end of March, up 8% from a year earlier on price increases and more customers purchasing multiple services. At the end of March, Comcast had more than 50 million video, internet, or voice subscribers, up 3% from a year earlier. Gains of 7% in internet and voice offset a 2% decline in video customers.

Video, internet, phone, and business services provided via cable lines combined to generate 64% of Comcast's revenue and 80% of operating cash flow in the last four quarters. Nonvideo businesses grew revenue 10%. To sustain that growth Comcast must land more business customers. The company sees a $20 billion to $30 billion opportunity in small and medium-sized companies — and believes it can eventually capture 20% of that market, up from its current $2.2 billion in annual revenue.

Comcast shares dipped after a mostly solid March quarter, in part because of concerns about programming costs at NBCUniversal (36% of revenue, 20% of cash flow). Cable networks saw operating cash flow fall 1% in the March quarter despite a 6% rise in revenue. However, the National Basketball Association lockout accounted for most of the new costs, as the compressed schedule forced networks to purchase more games in the quarter than expected.

While raw March-quarter numbers may not paint a true picture of Comcast's costs, the danger is real. Fortunately, Comcast can play at both ends of this pool.

Broadcasters must pay ever higher prices for content. But networks NBC and Telemundo; cable channels such as USA, E!, and CNBC; and a dozen regional news and sports networks provide Comcast with a vast library of TV shows. Add to that Universal Studios' more than 4,000 films, and over time Comcast should be able to transform its content into new sources of cash via retransmission.

Conclusion

Comcast isn't cheap, but 15.6 times the 2012 profit estimate seems a reasonable price to pay for a company capable of growing per-share profits 10% to 15% annually over the next five years. You can obtain an annual report for Comcast Corp. at 1 Comcast Center, Philadelphia, PA 19103, (888) 883-8903, www.comcast.com.

COMCAST
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '12
0.45
vs.
0.36
+ 23%
30.41
-
24.28
19 - 15
Dec '11
0.47
vs.
0.35
+ 55%
25.32
-
19.72
17 - 14
Sep '11
0.33
vs.
0.32
+ 51%
26.14
-
19.19
18 - 13
Jun '11
0.42
vs.
0.33
+ 50%
27.16
-
23.32
20 - 17
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
55.84
1.67
0.43
27.16
-
19.19
16 - 11
2010
37.94
1.36
0.38
22.40
-
15.10
16 - 11
2009
35.76
1.10
0.27
18.10
-
11.10
16 - 10
2008
34.26
0.91
0.19
22.86
-
9.20
25 - 10
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
77
66
87
62
86
83

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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