Comcast/NBC Picture Still Fuzzy

1/4/2010


  Recent Price
$17
  Dividend
$0.27
  Yield

1.6%

  P/E Ratio
14
  Shares (millions)
2,877
  Long-Term Debt as % of Capital
40%
  52-Week Price Range
$17.35 - $10.33

Ralph Roberts started Comcast ($17; CMCSA) in 1963 because his neighbors in Tupelo, Miss., couldn’t get a clear picture on their television sets. From that idea, Comcast has grown into the largest U.S. cable company, with nearly 42 million video subscribers. And it just got bigger.

Pending the approval of U.S. regulators, Comcast has agreed to take a 51% interest in NBC Universal from General Electric ($15; GE), a deal valued at $28 billion. Comcast will contribute to the joint venture $6.5 billion in cash and $7.25 billion of assets that include its cable and regional sports networks. The new entity also assumes $9 billion of debt from GE, which can eventually sell its entire stake to Comcast.

Comcast was founded on static, and critics argue that its current path, now steered by Ralph’s son Brian, is similarly garbled. Rankled by the dismal track record of media megadeals, many investors — ourselves included — question the wisdom of the NBC deal.

Despite these concerns, the stock’s strength is undeniable. Comcast has risen 54% from March lows and in December hit its highest point since January 2009. Yet Comcast, a Focus List Buy and a Long-Term Buy, trades at just 14 times trailing earnings, 48% below its three-year average.

A lot more than TV

NBC Universal is best known for its namesake, the television network with a peacock logo. But Comcast will also take over more than a dozen cable networks, a movie studio, and theme parks, adding to its own sprawl that includes two professional sports teams. Some of these new operations fall outside of Comcast’s experience.

The deal will likely face opposition from cable content providers and other distributors. While regulators are expected to approve the deal, a review could last as long as a year, possibly straining Comcast’s resources.

However, there are advantages to Comcast’s timing. The advertising and broadcast environments show signs of stabilizing, meaning NBC’s operational slump could be bottoming out. Moreover, the shift into programming helps insulate Comcast from the rising fees content providers are charging cable companies.

Online push

Comcast is a leader in cable’s TV Everywhere initiative, aimed at delivering video content through multiple formats. Fancast XFinity TV, a service launched by Comcast in December, makes cable shows and movies available online at no extra charge. Subscribers now have access to 2,000 hours of content from 27 networks.

The programs are important because they could establish a business model for streaming content, helping Comcast retain customers who might otherwise cancel their subscriptions in favor of free content offered on other Web sites.

Conclusion

While the NBC deal carries risk, the strategic benefits are obvious. It will take time to assess the true effect of the deal, but the stock’s price already reflects plenty of risk.

Comcast’s sales growth dropped off in 2009, but Wall Street still expects 4% higher revenue. The consensus projects sales growth of 3% and per-share-profit growth of 2% in 2010, targets Comcast seems capable of exceeding. An annual report for Comcast Corp. is available at One Comcast Center, Philadelphia, PA 19103;
866-281-2100; www.comcast.com.

COMCAST
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Sep '09 $0.33 vs. $0.26 + 3% $17.68 -

$13.04

16 - 12
Jun '09 0.33 vs. 0.21 + 5% 17.06 - 13.17 17 - 13
Mar '09 0.27 vs. 0.19 + 5% 18.10 - 11.10 19 - 12
Dec '08 0.27 vs.

0.20

+ 9% 19.62 - 12.50 23 - 15
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $34.26 $0.91 $0.25 $22.86
-
$9.20 25 - 10
2007 $30.90 $0.74 $0.00 30.18
-
17.37 41 - 23
2006 $24.97 $0.47 $0.00 28.94
-
16.90 62 - 36
2005 $22.26 $0.33 $0.00 23.00
-
17.20 70 - 52
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
96 78 95 87 65 79 42

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


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