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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Could Guru Investors Be Wrong on Comcast?

Up 168% in the last 5 years, company continues to strengthen its position in the market

Comcast (NASDAQ:CMCSA) seems to be a placeholder position for a large number of big money managers. Funds run by Donald Yacktman, Jim Simons, George Soros, Joel Greenblatt, Ken Fisher, Mario Gabelli and Jeremy Grantham are just a few of the long list of names in the stock.

Rightly so. Comcast has built a stellar business by making investments within a largely monopolistic industry, cable and Internet providers. Through more than 150,000 full-time employees, the company dominates the media landscape and has enough money to throw around speculative bets like $200 million on Buzzfeed – that’s what it brings in net every 10 days.

Founded on June 28, 1963, in Tupelo, Mississippi and now headquartered in Philadelphia, the underlying financials have grown over every five-year period dating back to the dot-com bubble, when people really started to get hooked on the consumption of Internet-related products and services.

For example: Amazon (NASDAQ:AMZN) was founded in 1994, Priceline (PCLN) in 1997 and Salesforce (NYSE:CRM) in 1999, but it wasn’t until broadband access ramped up that these and other Internet-based companies began to see massive gains in profitability. Comcast was a major driver of Internet expansion that now permeates every part of our lives. In fact, most estimates I’ve read drastically underestimate the time we all spend online. More and more Comcast is the company that controls the pipeline to that activity.

More importantly, for investors at least, despite being named the “worst company in America” in 2014, the financial trend has consistently been to the upside.

2001

  • Revenue: $9.6 billion.
  • Income: $609 million.
  • Book: 6.67.

2005

  • Revenue: $21 billion.
  • Income: $928 million.
  • Book: 12.56.

2010

  • Revenue: $37.9 billion.
  • Income: $3.6 billion.
  • Book: 15.98.

TTM

  • Revenue: $75.9 billion.
  • Income: $8.1 billion.
  • Book: 22.02.

Comcast did recently post a rare down quarter with adjusted earnings falling a penny from a year ago – 83 cents versus 84 cents. This was the company’s first negative comp in more than three years, due in part to a big decline from feature films, declining from $2.27 billion to $1.35 billion. Further declines in this segment are expected after the company’s DreamWorks (NASDAQ:DWA) acquisition through the NBC Universal subsidiary.

What’s more, the company’s operating cash flow was put under pressure, but all in all this should be short lived, and Comcast should be back on track with its usual growth rates by year end.

The cable subscriber churn has been lower as the growing demand for high-speed data services increases. Of course, Comcast xfinity is one of the only providers in the areas it operates. AT&T (NYSE:T) DSL and Verizon (NYSE:VZ) DSL are no longer viable options due to speed issues. Here in D.C., and I suspect many parts of the country, Verizon Fios (and comparable services) doesn’t cover the same area as xfinity broadband; thus Comcast has a quasi-monopoly on most homes that want high speed Internet access. Plus, the service plans offered by the company simply make more financial sense the more entrenched a customer becomes with all the services. You actually get a better price because you bundle and now that the company includes other services like security and telephone, people are getting hooked on Comcast in much more long-term way.

And, that’s where the problem is, for me anyway. I’m a long-time customer of Comcast across three different states, and while the high-speed service has been good, the customer service has been horrible. The more monopolistic the company’s position becomes in the industry, the less focus it needs to have on creating a better customer experience. Just having an automated system or someone to speak with is not enough, and that would be the only impediment to the upward progression of its market price.

Comcast has an extremely wide economic moat, sells at 16x forward earnings and issues a small dividend, but is it worth $158 billion? Yes, especially if the cable and media industries continue to grow, helping it turn $8.1 billion into $24 billion by 2025, the future market value could be $300 billion to $400 billion, or higher. The company adds tens of thousands of new customers each quarter, constantly increases Internet speeds and for a company its size does a decent job handling complaints. That’s where the biggest upside advantage really comes in.

If Comcast can solve the systematic customer service issues it has, become more human about the interactions and adjust to what the account holder may find appealing, then the profit and customer acquisitions could advance even more rapidly – if people wanted to do business with them. Eventually Google Fiber will be nationwide and potentially free. What happens then is anyone’s guess.

Disclosure: I do not have a position in any stocks mentioned in this article.

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About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website


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