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Comcast: A Solid Long-Term Buy

May 22, 2014 | About:
Vinay Singh

Vinay Singh

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Comcast (CMCSA) recently reported strong second quarter results. With consistently growing demand for broadband due to rising popularity of various internet enabled devices coupled with strong collections from "Fast & Furious 6," which propped up growth in the NBC Universal division, Comcast ended the second quarter on a high note.

Comcast's high-speed broadband division came through as the biggest revenue driver in this segment with collective video, Internet and voice customer additions of approximately 189,000. The company’s bundling strategy is proving extremely successful, as it bolstered revenue and reduced the pay-TV subscriber loss.

It is imperative for investors to comprehend the key drivers behind Comcast's business in order to assess if it is an appropriate addition to their portfolio.

Highlights

Comcast's Cable & Communication service is comprised of cable TV services, Video on Demand, high-speed Internet and voice services. It is an integral part of the company, as it represented 63% of Comcast’s total revenue and more than 80% of its income before depreciation and amortization during the previous fiscal year.

Another key driver for the company is its pay-TV subscriber trend. The company witnessed a noticeable slowdown in subscriber loss, as it only lost 159,000 subscribers relative to 176,000, during the same quarter in the previous fiscal year.

Similarly, broadband services are also a key contributor to its overall revenue. During the second quarter, revenue through its broadband division witnessed an 8% growth, as the company is striving hard to differentiate itself from its peers by offering higher service speed to its subscribers. At present, Comcast's high speed broadband penetration stands at around 37% of "homes passed." In addition, 33% of its total residential high-speed broadband customers opted for its high speed tier (20 to 25 MB) over its basic offering (15 MB).

NBC Universal Looks Promising

Comcast acquired NBC Universal from General Electric for a whopping $16.7 billion. This particular division represents approximately 37% of Comcast's overall revenue. During the second quarter, all subdivisions of NBC Universal performed reasonably well, as revenue from the cable networks division exhibited an 8% increase, while revenue from distribution and advertising grew 4% and 6%, respectively

It is noteworthy that the revenues from the broadcast television division were propped up by 12%, reaching $1.7 billion. The growth was primarily underpinned by an increase in advertising revenue, which suggests relatively higher prime time ratings for the broadcast network.

Going forward, I expect NBC Universal to incrementally develop and create more original programming, as such the broadcasting network has entered this quarter on the back of a phenomenal performance exhibited by "America's Got Talent" during the previous month.

Recently, Universal pictures got into a strategic partnership with Legendary Entertainment, where Universal will finance, market and distribute its films starting from 2014 for the next five years.

"Under the terms of the deal, both companies will identify potential opportunities to prop up Legendary's franchises and intellectual property into Universal's theme parks. In response, Universal will partner with Legendary on its projects related to China Film Group."

Competitive Landscape of the Industry

Comcast competes with companies such as AT&T, Verizon and CenturyLink, as they build wireline fiber-optic based networks that provide video and high speed broadband connections. However, in this article, I will cover DirecTV and Dish Network as its competitors.

DirecTV recently reported its second quarter earnings. The overall revenue reported by the company witnessed 6.5% growth; however, the macroeconomic headwinds presently surrounding Brazil negatively impacted its overall earnings.

The relative fall in subscriber additions across Latin America was predominantly due to a higher rate of cancelations, which surpassed 3% from 1.8% initially. DirecTV only added 165,000 subscribers during the second quarter, which is a sharp decline from 645,000 subscribers added during the same quarter in the previous fiscal year.

DirecTV has experienced tremendous success across Brazil, especially in middle-market products. Moving ahead, the company expects the churn rate to go up, but as the pay-TV market across Latin America is under penetrated and far below the saturation level, I expect DirecTV to continue its successful run in this region for the next few years.

DirecTV struggled with its domestic operations, as it lost approximately 84,000 subscribers, relative to 52,000 during the same quarter in the previous fiscal year. However, its revenues grew 5% to a shade under $6 billion, owing to an increase in its average revenue per user, or ARPU.

The pay-TV market trend in the U.S is not optimistic with a heavily saturated market. Therefore, going forward, the company is expected to somehow reduce the subscriber loss rather than posting any organic growth.

Similarly, Dish Network also competes with Comcast. Unlike its competitors, Dish Network has not exhibited much interest in bundling its services. Rather, the company seems heavily inclined towards entering the wireless industry.

The company is in talks with T-Mobile on the possibility of a merger. Considering T-mobile possesses approximately 43 million subscribers with a country wide 4G LTE network, which enables it in generating revenues in excess of $20 billion, such a merger could turn around Dish's fortunes.

Dish Network recently declared its second quarter earnings. At the end of the second quarter, its pay-TV subscribers were down 0.3% year over year; in contrast, the company added 61,000 net subscribers for its broadband division. The company saw a marginal increase in its subscriber churn rate, while the programming content cost also crept up.

Going forward, the company is aiming to turn its core business into a premium service provider in the U.S. pay-TV industry largely to bring down the churn rate. Additionally, Dish Network's bundled services will enable the company in slowing down the subscriber loss while offering a stern challenge to services such as Netflix.

Conclusion

In this brief analysis on Comcast we explored its key business units and what drives its business. I believe its stock still has a massive upside to it, as I expect its robust performance in the broadband division and NBC Universal to continue for the coming quarters.

Like its competitors, Comcast is also witnessing subscriber loss in its pay-TV division; however, the bundling strategy is certainly proving effective, as it is slowing down the subscriber loss. Comcast has strong fundamentals, which makes it a long-term trade.


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