Comcast Brawl Is Must-See TV

10/6/2014


  Recent Price
$53
  Dividend
$0.90
  Yield
1.7%
  P/E Ratio
19
  Shares (millions)
2,628
  Long-Term Debt as % of Capital
45%
  52-Week Price Range
$57.49 - $44.09

One of Comcast's ($53; CMCSa) earliest business ventures involved buying a string of Muzak franchises. While most of us can block out the bland background music, it has been tougher to avoid the cacophony of criticism over Comcast's latest deal.

The proposed $45.2 billion acquisition of Time Warner Cable ($142; TWC) has stirred strident opposition and bellicose rhetoric, with normally tight-lipped Comcast executives using words like "ransom" and "extortion."

The merger battle has captured investor attention but has not slowed earnings growth. In the 12 months ended June, Comcast's per-share profits rose 16%. However, cash from operations fell 5% during the period and has declined in five of the past seven quarters. Free cash flow has slipped in eight of nine quarters.

While recent cash-flow trends are somewhat worrisome, Comcast consistently delivers sales growth and fatter profit margins. The consensus projects profit growth of 14% for the second half of 2014 and 11% in 2015. Comcast is a Buy and a Long-Term Buy.

A regulatory battle royale

The U.S. Justice Department sought new information from several companies in September, which may signal officials are intensifying their probe of the merger.

Comcast tried to pre-empt problems with plans to spin off 2.5 million TV customers and sell an additional 1.4 million. These divestitures would keep Comcast's video subscribers below 30% of the U.S. pay-TV market, historically a key threshold for regulators. However, the cable giant's concessions have done little to appease rivals or sway public sentiment. 

The company bears the brunt of consumer ire over soaring cable bills, though Comcast is somewhat like a toll collector, passing on higher fees for content. Programming costs, by far Comcast's largest operating expense (37% of revenue last year), have climbed 6% to 9% in each of the past five years. Comcast argues the acquisition would give it more leverage in negotiating programming fees, stemming the rise in cable bills.

Regulators are also concerned over Comcast's dominant internet position. Although Comcast has shed video subscribers in five straight years, its base of internet subscribers advanced 6% to 7% a year. Comcast now has 21.3 million internet subscribers, versus 22.5 million video subscribers. The Time Warner acquisition would give Comcast more than a 35% share of the U.S. broadband market, with a leading position in 16 of the 20 largest cities.

Conclusion

If anyone knows how to navigate these waters, it's Comcast, which in the past 15 years has made five acquisitions worth $5 billion or more. Analysts tend to agree the deal will win approval, though they differ on the severity of conditions regulators will impose. The deal has no break-up fee, so Comcast could walk away if the concessions become too onerous.

At 19 times trailing earnings, Comcast shares trade 12% above their five-year average, though they fall in line with the median for S&P 1500 cable and satellite stocks. Investors can obtain an annual report for Comcast Corp. at 1 Comcast Center, Philadelphia, PA 19103, (215) 286-1700, www.comcast.com.

COMCAST
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '14
0.75
vs.
0.65
4%
54.26
-
47.74
21 - 18
Mar '14
0.68
vs.
0.51
14%
55.28
-
48.99
22 - 20
Dec '13
0.66
vs.
0.52
6%
52.09
-
44.09
22 - 19
Sep '13
0.65
vs.
0.46
-2%
46.33
-
40.26
22 - 19
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
64.66
2.47
0.78
52.09
-
37.21
21 - 15
2012
62.57
1.93
0.60
38.22
-
24.28
20 - 13
2011
55.84
1.58
0.43
27.16
-
19.19
17 - 12
2010
37.94
1.31
0.38
22.40
-
15.10
17 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
84
59
65
84
72
58
77

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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