Comcast Corp. (CMCSA, Financial) is the largest cable provider in the U.S. with a network that reaches over 50 million homes and businesses, with 22 million TV subscribers, 25 million broadband users and 12 million voice customers.
Comcast also owns NBCUniversal, which offers a boatload of impressive content from channels like NBC, NBC Sports, CNBC, SYFY, Telemundo and the USA Network, as well as managing a film studio and theme parks in the U.S. and Japan. Not to mention the company’s digital content from Fandango and, most importantly, Hulu. Disney (DIS, Financial) may end up owning upwards of 70% of the market, but that still leaves Comcast with 30% of the big three in subscription-based entertainment.
Cord-cutting will not hurt Comcast that much
Over the past decade, communication and media companies have watched their economic moats shrink because of the "freemium" or practically free premium plans of technology companies. The YouTubes and Netflixes (NFLX, Financial) of the world, however, still rely on faster and faster internet speeds to deliver content. Very few people are going to post up at Starbucks (SBUX, Financial) and watch Netflix all day. Thus, the need for Comcast’s Xfinity service is still extremely high.
Analysts that say cord-cutting is putting cable companies out of business just don’t realize how hard it really is to actually do that if you care about internet connectivity, especially when you have multiple devices connected to a network. People are finding it difficult to afford all the devices they’ve bought to keep up with the virtually endless amount of content that can be consumed. While there are some independent providers, the majority of consumers are going to stick with Verizon (VZ, Financial), Comcast, Charter (CHTR, Financial) and AT&T (T, Financial) because they trust them to provide a consistent service. While there have been more cable networks offering direct-to-consumer monthly subscriptions, the consumer still needs high-speed internet to watch it.
At Comcast, new users can get 60 megabytes per second for about $40 a month and up to one gigabyte per second speed for $90 a month. Or, if you want to get crazy, two gigabytes will run you $300 a month. Verizon's Fios runs about the same for one gigabyte of speed, and both companies try to sell their “double play” and “triple play” packages because if you have television, internet and phone service, it’s going to be harder to drop. More importantly, most consumers do not actually have a solid alternative to cut the cord. Sure, in some major cities there may be gigabyte spots, but you shouldn’t put your home network on it.
Financially speaking, Comcast has done a fantastic job in the last decade. It’s been almost 10 years since the NBCUniversal deal was announced and over five years since it took 100% ownership of the company. Looking at the numbers, it’s apparent just how lucrative that deal was for Comcast. Paying $6.5 billion in 2011, it has seen its top line grow by $50 billion and has taken in over $70 billion in profits since then. Going forward, with the threat of pricing regulation diminished, Comcast could offset declines in pay-TV users with higher broadband prices.
Of course, it’s a consumers' market. Despite having a strong position in the regions it operates, only 45% of homes that Comcast currently passes subscribe to its broadband services. That’s up from 35% in 2012, but a long way off from where it could be five to 10 years from now. When the next bear market comes, consumers will keep paying the bill, so unless some new technology renders past telecom investments inconsequential, the capital Comcast has already deployed will keep it in a leadership position for decades to come. That’s just on the residential side. The company has leveraged its residential footprint to turn its business services into a $6 billion business with higher margins; a market that Comcast already has a 40% share and believes has a total opportunity value north of $25 billion.
Investment analysis
The company’s current price multiples are lower than its historical averages across the board, a potential recipe for short-term price appreciation. Comcast is expected to earn in the neighborhood of $2.63 per share in the next four quarters, pushing book value upwards of $17 per share. Based on its five-year average price-book and price-earnings ratios, that could place the stock price between $45 and $50 per share. Long term, Comcast should continue to produce strong financials while using cash to buy back stock as well as boost earnings per share, book value and dividend payments.
Disclosure: I am not long or short CMCSA.Ă‚
