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February 02, 2006

Comcast Earnings Preview

Comcast (CMCSA/K) reports before the open on Thursday. So far in 2006, CMCSA has risen 7.5%. I think this sets up a big move in the stock off the earnings report as investors will either be disappointed and willing to lock in this year's gains or they will be happy and build on the gains. I am in the bull camp.

Expectations for the quarter call for revenue of $5.72 billion and EBITDA of $2.19 billion. All but about $250 million in revenue and $50 million in EBITDA will come form the company's cable operations with content providing the balance. While the NHL contract could provide negative volatility in the overall results, it will be growth rtes and metrics within cable that determine how the Street reacts to the results.....

Most street estimates call for revenue growth in cable of about 10% and EBITDA growth of 11-13%. Maybe just as important will be subscriber growth numbers and ARPU. Basic subs fell 46,000 last quarter which ignited the selling that pushed the stock steadily lower through the end of 2005. Analysts are expecting a return to positive sub growth in 4Q05 with estimates ranging form 30,000 to 70,000. Estimates for high speed data subs are tightly bunched at 360,000 net adds. The range of estimates for digital TV adds is larger, falling between 254,000 and 360,000. In late December, management announced VOIP telephony additions which indicated a sharp pickup in the weekly add rate, so telephony in 4Q won’t be a surprise.

Telephony in 2006 is key, however. The current run rate implies 750,000 to 1 million net additions for VOIP. However, VOIP is currently being offered in only about half of the company's footprint, so some analysts are speculating that the company could raise its 1 million net add guidance. I think the company will play it safe and maintain guidance but upside exists. It will probalby be like the HSD rollout where for two years, Comcast consistently raised the net add guidance.

There are a couple of other things to keep an eye on during the report and conference call. First, ARPU trends in 4Q05 should remain firm. Despite all the concern aobut competition, ARPU in video and data has been very firm throughout 2005. I don’t expect that to change in 4Q or in 2006. On the video side, everyone is raising prices, with the largest increases appearing on introductory packages. RBOC entry in scale is still down the road so this could be a source of positive surprise in 2006. On data, despite some aggressive promotional pricing by RBOCs and Comcast, ARPU has actually been stable this year. I also expect this trend to continue although Comcast will continue to cede market share to keep its ARPU up. I think this is a good business decision and is another source of positive surprise for 2006.

Second, pay attention for announcements on share repurchase. Comcast announced and probably completed a $2 billion buyback in 2005. Will the company be more aggressive in 2006? I hope so and if they do get more aggressive, the Street will be happy.

One thing that could get in the way though would be an unexpected hike in capital spending. 2005 saw capital spending come in at $3.5 billion, some $500 million ahead of initial expectations. This is probably the main reason why the stock performed so poorly since last summer. Any signal that spending will rise again in 2006 will be punished by investors.

Posted by Steve Birenberg at February 2, 2006 11:09 AM in Comcast/Cable TV