Nicole Rivera, 4/15/07
Comcast Corporation (CMCSA)
I. Company Overview
As the largest cable operator in the United States, Comcast Corporation provides services to over 24.2 million cable customers, 12.7 digital cable customers, 11.5 million high-speed Internet customers, and 2.5 million voice customers in 39 states. Headquartered in Philadelphia, PA, the company was originally founded in 1963 by Ralph J. Roberts (who still serves as Chairman of the Executive Finance Committee), Daniel Aaron, and Julian A. Brodsky under the name “American Cable Systems” and renamed as Comcast in 1969. Today, the company is led by Chairman and CEO Brian L. Roberts, the son of Ralph J. Roberts and is primarily comprised of two business segments: cable services and programming.
The cable segment of the company consists of video, Internet, and phone services. Its video services include basic cable, digital cable, ON DEMAND services, HDTV, DVR, and pay-per view programming. Customers pay monthly subscriptions for these services. Approximately 95% of the company’s revenues come from its cable services.
The programming segment of Comcast includes the television networks the company news, including E!, Style, the Golf Channel, VERSUS, G4, and AZN. Advertising sales and licensing fees account for the majority of the revenues generated in this segment of the company.
The company has a controlling interest in the Comcast Spectacor, which owns the Philadelphia Flyers, the Philadelphia 76ers, and two arenas. It has non-controlling interests in MGM, iN DEMAND, PBS Kids Sprout, TV One, and various other television networks.
II. Industry
The Broadcasting & Cable industry is dominated by a few major players, including Time Warner, DirecTV, EchoStar Communications, Cablevision Systems Corporation, and smaller regional cable companies. Comcast also competes with other companies such as AT&T and Earthlink.
The nature of the cable industry allows for the creation of natural monopolies that precludes the successful entrance of new competitors. The high start up costs involved with starting a cable company that could compete with these larger companies provides a formidable barrier to entry for companies interested in entering the industry. As a result, many areas sometimes have only 1 provider, giving cable providers substantial power over their potential customers.
The cable industry in particular can be cyclical and is heavily dependent on interest rates because of the capital intensive nature of the industry.
Some potential threats to cable are satellite, which offers a very similar substitute for cable.
III. Technical Analysis
The 1 month chart indicates that Comcast has remained pretty average and in the middle compared to its competitors. Recently, however, the company has been able to surpass them.
In the past year, Comcast has shown to be a strong competitor in the industry, systematically earning higher returns than its competitors and the market.
IV. Fundamental Analysis
One of the aspects to consider when analyzing cable companies are their earnings before interest, taxes, depreciation and amortization (EBITDA), which allows one to look at the profitability of the company without taking into account the potentially distorting financial and accounting decisions made by the companies. Comcast had an EBITDA of $9442 million for the year in 2006. Time Warner Cable had an EBITDA of $4229 million whereas DirecTV has one of $3391.2 million. Overall, this increase in its EBITDA indicates the strength of Comcast’s performance compared to the rest of the market.
One can also take a look at the DuPont Analysis of the firm in comparison to its competitor, Time Warner.
Ratio*[*] / CMCSA 2006 / TWC 2006Net Profit Margin (ROS) / 10.15% / 17.80%
Asset Turnover / 22.61% / 19.92%
= Return on Assets (ROA) / 2.29% / 3.54%
x Financial Leverage / 2.68 / 2.37
= Return on Equity (ROE) / 6.15% / 8.40%
From this analysis, one can see that CMCSA’s return on equity is not quite as high as that of Time Warner. While Comcast has higher asset turnover, indicating that it can generate more dollar revenues for every dollar it has in assets, and higher financial leverage, its net operating margin, or how much profit it generates for every dollar in sales, is not nearly as high as Time Warner’s.
V. Valuation
Ratio / CMCSA / TWC / Industry / S&P 500Price to Earnings / 39.66 / 40.88 / 25.79 / 20.45
Price to Sales / 3.48 / 3.21 / 2.94 / 2.85
Price to Book / 2.11 / 1.60 / 4.08 / 3.99
Overall, Comcast has a higher P/E and Price to Sales ratio in comparison to the Industry and the S&P 500, suggesting that the stock is overvalued in the market. It’s price to book ratio, however, is lower than that of the market, hinting that the company could be slightly undervalued as well. Interestingly, Comcast’s stock tends to follow the same trend as that of Time Warner.
Ultimately, because Comcast is a leader in its field, and because of its potential growth opportunities, we should expect its P/E to be anywhere between the industry average (25.8x) and slightly higher than its competitor, TWC (41x). We do not really expect the price to fall as low as the industry average necessarily, so a good price to buy would possibly be at a P/E of 30x, so about $21.30 a share, and a good price to sell at a P/E of about 43-44x (slightly higher than TWC’s), so between $30-31 a share.
VI. Investment Risks
One of the major things to consider right now is the fact that it’s P/E ratio is higher than the industry average and it’s return on equity is not as high as that of Time Warner’s, Comcast may not be performing as well as it should these days. Furthermore, its stock has recently been climbing, indicating that perhaps the stock price has only to fall from here.
VI. Investment Opportunities
Its “triple play” policy of offering cable, Internet, and phone options to customers has been very successful recently, and its continued push with this will probably lead to further success with the company.
Although there are some worries that the company will have to increase some of its capital expenditures, the reasons for these lie, according to CEO Brian Roberts, in the fact that the company has to deal with an increasing number of phone subscriptions – about 50,000 a week. Furthermore, the company will continue to buy back its stocks, despite these costs, indicating that the company is confident in its future growth and success. Jim Cramer insists that Comcast is “done going down” and has only to go up these days.
Comcast has also shown that it is committed to efficiency and technological growth. Recently, it eliminated its analog transmission services for 38 channels in its basic cable service in Chicago, which would force residents to upgrade to digital cable boxes. While inconveniencing some customers now, the move allows the company to have greater bandwidth and forces customers to advance technologically.
Furthermore, the company is set to acquire Fandango.com and Patriot Media, a cable company in Princeton, NJ with upper-class residents it hopes will be able to purchase some of its more high-end and exclusive services. These opportunities allow the company to grow and expand in new directions.
VII. Recommendation
I recommend that SWS invest in Comcast, but when the price reaches around $21.30. First of all, in the past year Comcast was able to triple its earnings, indicating the strength of its “triple play” package of services, including cable, phone and Internet. Secondly, the company is committed to grow and expand. Although it stands as the largest cable company in the United States, it still hopes to further expand by acquiring Patriot Media in Princeton, NJ. It also hopes to acquire Fandango.com, which would give it a new and unique way to expand the different services the company offers overall. Its commitment to technological growth and efficiency is also a positive aspect of the company that investors should look at when considering purchase of the stock. Lastly, the popularity of the company and the increasing number of subscribers to its services is also a positive aspect about the company that should be evaluated. Its earnings before taxes, interest, depreciation and amortization have also been higher than its competitors, which further suggests the strength of the company compared to its rivals. While there are some risks that need to be considered before purchasing the stock, I believe that the company’s future prospects are strong enough to offer steady but sizeable returns in the future. The price of the stock will probably fall slightly soon because expected earnings are supposed to be lower due to sudden increases in costs (earnings will come out on April 26). Nevertheless, because of the growth opportunities stated above, it is likely that the stock price will rise again as stated in the valuation.
[*] ROS = Net Income/Sales; Asset Turnover = Sales/Assets; Financial Leverage = Assets/Equity; Return on Equity = Net Income/Equity