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America's Two Largest Providers of Wired Broadband

Victor Selva

Victor Selva

9 followers

Comcast Corporation (CMCSA) is a media and technology company with two businesses, Comcast Cable and NBCUniversal Media LLC. The company has five segments: Cable Communications, Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks.

In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.

$45 Billion Deal

It comes less than a year after Comcast completed the acquisition of NBC Universal. In this opportunity, the company had agreed to buy Time Warner Cable (TWC) for $45 billion in a deal that would combine the two biggest cable companies in the United States.

Time Warner Cable investors will receive 2.875 Comcast stock for each of their shares. The purchase values each Time Warner Cable share at almost $160.Analysts say the consolidation could help Comcast to compete with satellite providers like DirecTV (DTV), wireless phone companies like AT&T (T) and new streaming services like Netflix (NFLX). On the other hand, Comcast will not have to take on any new debt, because it is an all-stock deal with newly issued shares.

Last year, the combined total revenue was approximately $86.8 billion and a 10% net profit margin. Comcast is expected to derive a significant $1.5 billion of operating synergy from this merger of which 50% may be realized within the first year after merger.

The advantages for consumers are: network upgrades, better cable TV services, and expanded broadband access for low-income users.

Although Comcast and Time Warner Cable do not compete directly in any markets, regulators are likely to take a close look at the potential impact. Recently, the companies have filed a request for review with the Federal Communications Commission, one of the agencies that will have to approve the deal between both companies. The merger will take effect by the end of the year.

Relative Valuation, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 19.6x, trading at a discount compared to the industry mean, which indicates that the stock is relatively undervalued. Earnings per share (EPS) has increased by 28.6% in the most recent quarter compared to the same quarter a year ago, $0.76 per share for the fourth quarter. In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance had an upward trend over the last five years.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased from the same quarter one year prior. This is a clear sign of strength within the company.

Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

CMCSA

Comcast

13.45

TWC

Time Warner Cable

28.14

DISH

DISH Network Corp

82.64

LINTA

Liberty Interactive Corp

7.22

RCI

Rogers Communications, Inc.

45.12

SJR

Shaw Communications, Inc.

17.84

TIVO

Tivo, Inc.

49.5

The company has a current ratio of 13.45% which is higher than the one registered by Liberty Interactive Corp (LINTA). But for investors looking for a higher ROE, Time Warner Cable, DISH Network Corp (DISH), Rogers Communications, Inc. (RCI), Shaw Communications, Inc. (SJR) and Tivo, Inc. (TIVO) could be better options.

Final Comment

We think the strategic acquisitions will further extend Comcast’s lead as the nation’s largest cable operator. Comcast will expand its existing services to cover TWC customers and extends its leadership in the cable industry.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like Murray Stahl (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Glenn Greenberg (Trades, Portfolio), Robert Olstein (Trades, Portfolio), David Tepper (Trades, Portfolio), Chase Coleman (Trades, Portfolio), Larry Robins and Caxton Associates (Trades, Portfolio) have taken long positions on it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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