Comcast: A Dynamic Company

Comcast (CMCSA, Financial) delivered its quarterly earnings Wednesday for the period ending Sept. 30. The 53-year-old American global mass media conglomerate delivered 7.4% sales growth to $59.4 billion for its nine months ended in the period and 4.26% profit growth to $6.6 billion. As a result, Comcast lost 3.04% in its share price while the broader Standard & Poor’s 500 index closed -0.17%.

"I'm pleased to report that our businesses generated double-digit revenue and operating cash flow growth for the third quarter of 2016. Cable delivered solid operating cash flow growth coupled with great customer metrics and has now added 170,000 video subscribers over the past 12 Â months.

"The Rio Olympics were the most profitable and successful games in our history, and demonstrated our ability to deliver an unparalleled entertainment experience through NBCUniversal together with Comcast Cable and the X1 platform.

"NBCUniversal reported operating cash flow growth of over 30%, benefiting from the Olympics, continued growth at our Theme Parks and the theatrical success of "The Secret Life of Pets" this quarter. I'm proud of our consistent execution and excited about the opportunities ahead for Comcast NBCUniversal." –Â Brian L. Roberts, chairman and CEO of Comcast Corporation

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Market performance

In the past five years, Comcast shares had a total return of 21.9% while the broader index had 13.9%. Year to date Comcast returned 12.8% while the latter provided 6.5% (2).

(Comcast, Annual Filing)

Comcast

Comcast is a global media and technology company with two primary businesses: Comcast Cable and NBCUniversal. NBCUniversal was acquired from General Electric (GE) in 2013 after Comcast initially took a major stake in the company back in 2011. The company, through its predecessors, has been in the cable systems business since 1963.

Comcast has four business segments: The Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks segments comprise the NBCUniversal businesses (collectively, the “NBCUniversal segments”) (4).

Comcast also has other business interests, which consist primarily of Comcast Spectacor, which owns the Philadelphia Flyers and the Wells Fargo Center in Philadelphia and operates arena management-related businesses.

(Comcast Designated Market Areas in Cable Services, Annual Filing)

Cable networks

Under this segment, Comcast has several lines of businesses: Cable Services, which provides services to 125,000 or more video customers; Video Services, which carries its services through the XFINITY brand; High-Speed Internet Services, with downstream speeds of up to 150 and 505 Mbps in limited markets; Voice Services, using an interconnected Voice over Internet Protocol (VoIP) technology; and Business Services, cable services to small and medium-sized businesses, and more recently, large enterprises with multiple locations. Within the segment, Comcast also receives revenue from advertising and cable franchises.

(Comcast National Cable Networks and Household Data, Annual Filing)

Cable Network segment contributed 62.9%, or $46.9 billion, in Comcast’s fiscal 2015 total sales. The segment delivered a 6.2% year-on-year growth while it had a 25.8% operating margin.

Nine months into 2016, the segment still contributed the most to Comcast’s topline with 67.3%, or $37.2 billion, and carried a 6.5% year-on-year growth with a 24.9% operating margin.

NBCUniversal segment

The segment carries its cable networks and broadcast television. NBCUniversal’s broadcast television segment operates the NBC and Telemundo broadcast television networks. The broadcast network also carries the NBC Network and 10 other NBC-affiliated local broadcast television stations.

(10 Affiliated Local Broadcast Television Stations, annual filing)

These networks collectively reached 33 million U.S. television households in 2015, which represented approximately 27% of U.S. television households.

The broadcast network also owns and runs Telemundo, a leading Hispanic media company that included 17 owned local broadcast television stations and the NBC Universo national cable network.

NBCUniversal segment, as a whole, contributed 38.2%, or $28.5 billion, in total fiscal 2015 sales and had a 17.1% operating margin.

The segment grew 10.3% year on year nine months into this year due to 55.3% growth in theme park revenue. NBCUniversal segment also had a 17.9% operating margin.

(NBCUniversal, company website)

NBCUniversal’s cable network business, meanwhile, grew 0.7% in fiscal 2015. The cable network business contributed second most to Comcast’s sales with 12.9%, or $9.6 billion. The cable network segment also had 28.2% operating margin for the period.

Nine months into 2016, the cable network business grew 10.2% and delivered a 28% operating margin.

(NBCUniversal, company website)

In 2015, NBCUniversal’s broadcast network segment lost  0.1% and contributed 11.4%, or $8.5 billion, in total Comcast sales for the period. The segment had a 7.8% operating margin.

Nine months into this year, the segment grew 21% compared to the same period last year and delivered a 13.2% operating margin.

(Universal Pictures, company website)

Filmed entertainment

The segment primarily produces, acquires, markets and distributes both live-action and animated filmed entertainment worldwide, and it also develops, produces and licenses live stage plays.

Comcast’s films are produced primarily under the Universal Pictures, Illumination and Focus Features names.

NBCUniversal’s filmed entertainment segment delivered 45.5% year-on-year sales growth in 2015. This significant increase was brought by the success of "Furious 7," "Jurassic World" and "Minions." Each exceeded $1 billion in worldwide theatrical receipts, according to company filings. The segment also delivered 16.6% operating margin.

Nine months into 2016, filmed entertainment delivered -20% sales growth performance and 12% operating margin.

(Universal Studios, company website)

Theme parks

Comcast’s Theme Parks segment consists primarily of its Universal theme parks in Orlando, Florida, and Hollywood, California. Universal Orlando includes two theme parks, Universal Studios Florida and Universal’s Islands of Adventure, as well as CityWalk, a dining, retail and entertainment complex. Comcast also owns a water park, Wet ‘n Wild, in Orlando, Florida.

Comcast is also expanding its theme parks business through NBCUniversal’s acquisition of 51% interest in Universal Studios Japan last year and also plans to develop a Universal Studies in Beijing, China, together with a consortium of Chinese state-owned companies.

Comcast also licenses the right to use its Universal Studios brand name, as what can be observed with Universal Studios Singapore in Sentosa Island.

NBCUniversal’s theme parks segment delivered 27.3% growth in 2015, while presenting the highest operating margin among all Comcast’s business segments at 35.1% for the period.

So far in 2016, the segment delivered year-on-year sales growth of 55.3% and an operating margin of 32.7%.

Overall, Comcast had a five-year sales and profit growth figures of 14.45% and 17.56% (5).

Cash, debt and book value

As of Sept. 30, Comcast had total cash of $2.8 billion, 22% more than it had in December of last year. The $151 billion media company also had $60.4 billion in debt with a debt-equity ratio of 1.08.

Comcast had 30%, or $54 billion, of its $177.9 billion assets in goodwill and intangbiles while having a book value of $55.8 billion, a 3.4% compound annual growth rate since 2011.

Cash flow

(Comcast Cash Flow, quarterly filing)

Comcast lost 2.29% in its cash flow from operations to $13.5 billion nine months into this year, compared to the same period last year. The company allocated $6.56 billion in capital expenditures leaving it with $6.9 billion in free cash flow.

Comcast used 82%, or $5.7 billion, of its free cash flow in dividends and share repurchases in the nine-month period. Comcast allocated 80.3%, on average, of its free cash flow in dividends and share buybacks in the past three years.

Notably, Comcast also spent $3.9 billion on its acquisitions. Comcast acquired all of the outstanding stock of DreamWorks Animation SKG Inc. (DWA, Financial) for $3.8 billion in August (1).

The company also repaid $3 billion of its debt while taking in a total of $9.2 billion in borrowings for the period.

Valuations

Comcast had a trailing 12-month earnings multiple of 19 times (industry median: 20), book value multiple of 2.8 times (industry median: 2.3), price-sales (P/S) ratio of 2 times (industry median: 1.56) (3).

The media conglomerate also had a trailing 12-month dividend yield of 1.67% with a 32% payout ratio and 2.6% buyback ratio.

Conclusion

There seemed to be endless threats in the cable business, ranging from the rise of cord-cuttters to a presidential candidate threatening to disband the recent Comcast-NBCUniversal tie up, stating that the concentrated power observed in the merger “poison the minds of Americans.”

Nonetheless, Comcast undoubtedly delivered continuing sales growth figures. The film business, notably, had fluctuated in recent time brought by eventual successful films. While growing its businesses, the media company facilitated borrowing, too, to fund its operations and, possibly, shareholder return through payouts as well.

Despite the threats mentioned earlier, it seemed that it did not reflect in Comcast’s share price as it outperformed the broader market year to date. Also, Barclays had lowered its target price for Comcast shares back in February from $68 a share to $65 while rating it as an overweight.

(Comcast Share Price, Google Finance)

This seemed, once again, a bit prophetic. Upon reaching the $65 level mark for a few months, Comcast’s share price began to dip.

Nonetheless, using historical earnings multiple and five-year profit growth rates, I arrived at a value of $69 a share. A 20% margin would indicate a value of $55 a share.

In summary, Comcast would be a strong buy and hold for long-term at $55 level.

Notes

(1) Quarterly filing: DreamWorks creates animated feature films, television series and specials, live entertainment and related consumer products. The results of operations for DreamWorks are reported in Comcast’s Filmed Entertainment segment following the acquisition date.

(2) Morningstar data.

(3) GuruFocus data.

(4) Annual filing:

(A) Cable Communications: Consists of the operations of Comcast Cable, which is one of the nation’s largest providers of video, high-speed Internet and voice services (“cable services”) to residential customers under the XFINITY brand; we also provide these and other services to business customers and sell advertising.

(B) Cable Networks: Consists primarily of Comcast’s national cable networks, regional sports and news networks, international cable networks, and cable television studio production operations.

(C) Broadcast Television: Consists primarily of the NBC and Telemundo broadcast networks, 10 NBC and 17 Telemundo owned local broadcast television stations, and broadcast television studio production operations.

(D) Filmed Entertainment: Consists primarily of the operations of Universal Pictures, which produces, acquires, markets and distributes filmed entertainment worldwide.

(E) Theme Parks: Consists primarily of Comcast’s Universal theme parks in Orlando, Florida and Hollywood, California. In November 2015, NBCUniversal acquired a 51% interest in the Universal Studios theme park located in Osaka, Japan (“Universal Studios Japan”).

(5) Morningstar data.

Disclosure: I do not have shares in Comcast.

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