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February 14, 2008

Stability At Comcast

Comcast provided the stability and achievable guidance that is required to get a relief rally and improve sentiment toward the shares. The financial and subscriber results for 4Q07 were very close to guidance provided on December 4th. If anything the financial results for revenue, EBITDA, operating margins, and free cash flow were slightly better than expected. I am going to ignore the quarterly detail to focus on the big picture.

Guidance was also constructive. Consolidated revenue and EBITDA are projected to grow by 8-10%. Capital spending is projected at 18% of revenues, implying a flattish number for 2008. Put it together and you get 20% free cash flow growth. Some analysts may have had higher revenue and EBITDA growth but 8-10% will come as no surprise and many investors will be pleased that it was not worse. Another small issue is that the guidance is for consolidated results. Over 95% of EBITDA comes from cable but the rest is content that grew 20% last year suggesting that cable only guidance is more like 7-9%. I suspect that this is supposed to be an achievable number with no downside.

Also contributing to the relief rally and my view of stability of financial results and sentiment is the fact that Comcast initiated an annual dividend of 25 cents providing a yield of about 1.5%. The dividend is supposed to go up over time and will stay near the established rate of 1/3rd of free cash flow.

Comcast also announced that the share buyback has another $6.9 billion to be completed by the end of 2009. The recent pace of share buybacks has been high enough to make this realistic and shares outstanding are down by about 86 million over the past year. Even accounting for share creep from options, upon completion the share count should be down by an upper single digit percentage from the year end 2007 level.

One final note is that the new CFO revamped the presentation which had greater detail on capital spending and more clearly laid out the growth plans and the capital allocation strategy. This will also serve to increase confidence.

The bottom line is that the worst appears over Comcast shareholders. I do not expect a big recovery in the shares but upside to the low $20s is clearly achievable if the company can report the next few quarters in line with the new guidance. If Comcast can convince investors that for the next several years it can grow at 8-10% with 20% free cash flow growth the shares are undervalued. I think they will probably prove it but I think it will take time for investors to come around....

....How do they grow by 8-10%? The company noted it was in five business: video, data, voice, commercial, and advertising. Video can grow in the mid single digits even with modest customer loss to the telcos due to price increases, more digital subscribers, more on demand revenue, and especially more DVR and high def subscribers. Broadband is slowing but if the company achieves 40% penetration that would be another 6-7 million subs over the next five years. Telephone is at just 10% penetration. Cablevision and Cox are north of 20% overall in the 40-50% range in some communities. Commercial is just getting started and Cablevision, Cox, and Time Warner Cable are already proving that a multibillion revenue opportunity exists for Comcast (Comcast had $31 billion in revenue in 2007). Finally, advertising was a $1.5 billion business in 2007 just from the cable systems which fell 3% in 2007 due to tough political comparisons. In 2008, political should bounce back and cable systems have plenty of market share to gain from local TV stations.

Posted by Steve Birenberg at February 14, 2008 09:29 AM in Comcast/Cable TV