Some Thoughts on Comcast

Comcast (CMCSA) is a leading media and technology company in the U.S.

Its primary business is Comcast Cable, one of the nation’s largest providers of video, internet and voice services (primarily to residential customers under the XFINITY brand name). The business, which started as cable-TV operator with 1,200 subscribers in Tupelo, Mississippi, has been built over the past 55 years through a combination of organic growth and mergers and acquisitions (M&A).

At the end of 2016, Comcast had 22.5 million video customers, 24.7 million high-speed internet customers and 11.7 million voice customers. Comcast has successfully convinced millions of customers to bundle the company's various services: Roughly 70% of residential subscribers take at least two products, which is a key driver of customer retention for Comcast.

The cable business has consistently increased revenues at a midsingle-digit growth rate, driven by new customer additions (it has added more than 1 million net high-speed internet subscribers in each of the past 11 years) and 3% to 4% annual increases in average revenue per customer relationship. In addition, they have addressed white space opportunities like Comcast Business, where run rate revenues increased from less than $1 billion in 2009 to more than $6 billion in 2016 (and are still growing double digits). They’ve done this while holding operating expenses in check, resulting in segment EBIT margins of roughly 25% (slight margin expansion over the past five years). This is a good business with sustainable competitive advantages. For a new entrant, competing with Comcast’s local cable franchises would be an extremely difficult and extremely expensive endeavor; if you want a real world example, read this article from the Wall Street Journal about Google Fiber.

• CMCSA 30-Year Financial Data
• The intrinsic value of CMCSA
• Peter Lynch Chart of CMCSA

The next frontier for Comcast may be in the wireless business. The objective is to improve retention, which ultimately benefits lifetime customer economics. So far, Comcast has moved slowly; when asked about the potential for M&A on a recent conference call, CEO Brian Roberts shot it down, saying “No disrespect to wireless, but it’s a tough business.” The product it has rolled out is being marketed toward its cable customers; it relies on a combination of millions of Wi-Fi hotspots and a long-term mobile virtual network operator (MVNO) agreement with Verizon (which means Comcast's wireless service will run on Verizon's network). At this point, I don’t have any thoughts on where this takes Comcast.

In addition to the cable business, Comcast owns NBCUniversal, which it acquired from General Electric (GE) for roughly $30 billion (it acquired 51% through a joint venture announced in December 2009 and the remainder in 2013). As Roberts noted in a recent interview, it had been “knocking on the door for a decade” before GE was willing (or needed to) sell. NBCU consists of Cable Networks (CNBC, MSNBC and USA Network), Broadcast TV (NBC and Telemundo), Filmed Entertainment (Universal Pictures and DreamWorks Animation) and Theme Parks (in Florida, California and Japan). There’s been a significant improvement in the financial results under Comcast’s leadership: over the past five years, segment operating income increased from $3.2 billion (2011) to $6.1 billion (2016). Over that same period, segment operating margins expanded by more than five hundred basis points.

I think these improvements reflect a long-term commitment to reinvestment and putting the right people in charge. One notable example is in Broadcast TV. For years, NBC was ranked No. 4 among the broadcast networks; the Los Angeles Times reported in 2009 that NBC was expected to lose more than $500 million (according to people familiar with the finances). Fast forward to 2016: NBC was the No. 1 ranked network for the third consecutive year; in the Broadcast TV division, NBCU reported more than $1 billion in operating income (up ~70%). You can quibble about the cause of these outcomes (good luck, good management or some combination). Regardless, there's no doubt that the acquisition of NBCUniversal has been a home run for Comcast.

Conclusion

Comcast is a well-run, high-quality business. Management has proven adept at navigating a changing landscape, in addition to demonstrating intelligent capital allocation and operational ability over many years. Over the course of an investment lifetime, you will do quite well if you partner with high-quality individuals like Brian Roberts and Steve Burke.

Despite returning roughly two-thirds of the free cash flow generated over the past five years to shareholders in the forms of dividends and repurchases, the company remains conservatively financed relative to its peers. By my math, Comcast should generate ~$50 billion in excess FCF over the next five years (after dividends). Generating tens of billions of dollars in excess cash will give them the financial flexibility to quickly complete a large deal if the right opportunity surfaces. For this reason and the others mentioned above, Comcast holds an enviable hand.

My analysis leads me to conclude earnings per share is likely to increase by 10% or more per year going forward (that assumes no significant changes in financial leverage). While I don’t think the stock is a screaming bargain at current levels, it’s pretty reasonable (better than most things I've looked at as of late). If Mr. Market became a bit more pessimistic and pushed the shares lower, I’d think hard about buying some Comcast.

Disclosure: None

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