Before selecting a stock, there are a number of things that you need to consider in order to ensure that you are buying the stock of a high-quality company whose shares are poised to grow in value over time. Some of these concerns include what the company does, its competitive advantages, valuation, dividend payouts and sustainability, and earnings consistency.
Another important thing that you need to consider is the financial condition of the company in question. You want to know if the company is able to continue paying its bills, and how much debt it carries. The balance sheet is one of the most effective tools that you can use to evaluate a company's financial condition. In this article, I will discuss the balance sheets of Comcast CMCSA and DirecTV DTV, in order to get some clues as to how well these companies are doing.
I will go through the balance sheets of these two companies, reviewing the most important items, and seeing if there are any major differences between the two, making one a better investment than the other. Information that I used on Comcast can be found here, and information on Directv can be found at this link. Note that this article is not a comprehensive review as to whether either of these two stocks should be bought or sold, but rather, just an important piece of the puzzle when doing the proper due diligence.
This article might be a bit too basic for some and too long-winded for others, but I hope that some of you can derive benefit from it.
The business of Comcast is split into five segments. Their Cable Communications segment is the nation's largest provider of video, high-speed internet, and voice services (cable) under the XFINITY brand. This segment accounts for 63% of the company's revenue, with nearly 50 million customers in the United States. The Cable Networks segment includes national cable networks, regional sports and news networks, international cable networks, a cable TV production studio, and digital media. It has a Broadcast TV segment that includes the broadcast networks of NBC and Telemundo, local television stations, and TV production operations. The Filmed Entertainment segment includes the operations of Universal Pictures. It also has a Theme Parks segment that features the operations of Universal Theme Parks in Hollywood, CA, and Orlando, FL.
Aside from its Cable Communications segment, the other four segments were acquired when Comcast purchased a 51% stake in NBC Universal from General Electric in 2011. Then, in February 2013, the company agreed to purchase General Electric's remaining 49% stake in NBC Universal.
Comcast recorded over $62B in sales over the last 12 months and sports a market capitalization of $105B.
DirecTV acquires, promotes, sells, and distributes digital entertainment programming by satellite to residential and business customers. It also owns three regional sports networks that operate under the ROOT Sports brand, and 42% of the Game Show Network. The business is split into three segments. DirecTV U.S. provides digital entertainment to approximately 20 million subscribers in the United States. DirecTV Latin America provides digital entertainment to approximately 13 million customers in Latin America. The third segment is referred to as DirecTV Sports Networks, which owns the three regional sports networks mentioned above.
DirecTV recorded $29.7B in revenue over the year 2012, and has a market capitalization of $27.6B.
Cash and Cash Equivalents
The first line in the Assets column of the balance sheet is for the amount of cash and cash equivalents that the company has in its possession. Generally speaking, the more cash the better, as a company with a lot of cash can invest more in acquisitions, repurchase stock, and pay out dividends. Some people also value stocks according to their cash positions. Some of the larger and more mature companies tend not to carry a lot of cash on their balance sheets, as they might be more inclined to buy back stock with it, or pay out dividends.
Comcast reported $12.5B in cash and short-term investments on its balance sheet. This is well above the $1.7B that the company reported in 2011. This is due to four different things. First, the company used $6.4B in cash for acquisitions in 2011, with $6.2B going to General Electric for a 51% stake in NBC Universal. In 2012, the company received $3.0B from A&E Network, which redeemed NBC Universal's 16% interest in it. It also received $2.3B from wireless spectrum sales to Verizon in 2012. To top that off, the company borrowed $4.5B worth of long-term debt in 2012.
In 2012, Comcast paid out $1.6B in dividends and spent $3.0B on stock buybacks. These activities were well-supported by the company's free cash flow of $7.9B. The company plans to repurchase another $2.0B worth of stock in the coming year.
DirecTV had $1.9B in cash as of the end of 2012, up from $873M a year ago, due to the fact that the company borrowed $1.2B more in long-term debt in 2012 than in 2011. DirecTV spent $5.18B on stock buybacks in 2012, and the board has authorized up to $4.0B more in buybacks for 2013. The company generated $2.67B in free cash flow in 2012.
The table below illustrates this information pretty clearly. From looking at this table, you can see that the dividend payout and buyback amount of Comcast are both supported by its free cash flow. The same, however, cannot be said for DirecTV, which did not generate enough cash flow in 2012 to cover its buyback amount.
Dividend Payouts (TTM)
Free Cash Flow
Table 1: Cash Positions and What Comcast and DirecTV Do With Their Cash
Receivables constitute money that is owed to a company for products or services that have already been provided. Of course, the risk with having a lot of receivables is that some of your customers might end up not paying. For this reason, you usually like to see net receivables making up a relatively small percentage of the company's sales.
Comcast had $5.5B in receivables on its balance sheet, equal to 8.76% of its 2012 sales. This percentage was inline with the 8.33% of sales that it recorded in 2011, but higher than the 4.91% that it recorded at the end of 2010, most likely due to its acquisition of NBC Universal.
DirecTV reported $2.70B in receivables, equal to 9.1% of its revenue for 2012. This was inline with percentages of 9.1% and 8.5% for 2011 and 2010, respectively.
Given the relatively low percentage of sales that are receivables and the consistency of these numbers over the last couple of years, I don't see anything to worry about here for either of these two companies.
Another factor that I like to look at is the current ratio. This helps to provide an idea as to whether or not the company can meet its short-term financial obligations in the event of a disruption of operations. To calculate this ratio, you need the amount of current assets and the amount of current liabilities. Current assets are the assets of a company that are either cash or assets that can be converted into cash within the fiscal year. In addition to cash and short-term investments, some of these assets include inventory, accounts receivable, and prepaid expenses. Current liabilities are expenses that the company will have to pay within the fiscal year. These might include short-term debt and long-term debt that is maturing within the year, as well as accounts payable (money owed to suppliers and others in the normal course of business). Once you have these two figures, simply divide the amount of current assets by the amount of current liabilities to get your current ratio.
If a company's operations are disrupted due to a labor strike or a natural disaster, then the current assets will need to be used to pay for the current liabilities until the company's operations can get going again. For this reason, you generally like to see a current ratio of at least 1.0, although some like to see it as high as 1.5.
The current ratio of Comcast is 1.20, while DirecTV sports a current ratio of 1.00. Both of these figures suggest that each company has enough cash and other current assets on hand to meet its short-term financial obligations, even in the event of a disruption to operations.
Property, Plant and Equipment
Each of these two companies has capital expenditures that are associated with property, plant and equipment. In the case of Comcast, the assets under this category include cable transmission and distribution facilities, customer premises equipment and buildings. In the case of DirecTV, these assets include leased receivers for subscriber use, software, machinery and equipment.
Right now, Comcast has $27.2B in property, plant, and equipment on its balance sheet. This figure is inline with the $27.6B that it reported one year before, but significantly higher than the $23.5B that it reported at the end of 2010. This increase is due to two things. One is the 2011 acquisition of 51% of NBC Universal, in which the company acquired $2.32B in property, plant and equipment. Then, also in 2011, the company bought the remaining 50% stake in Universal Orlando. It already owned the other 50%. In this transaction, it recorded another $2.42B in property, plant, and equipment.
DirecTV reported $6.04B in property, plant, and equipment at the end of 2012, versus $5.22B at the end of 2011, and $4.44B at the end of 2010, due largely to issuing more leased receivers as a result of subscriber growth.
Goodwill is the price paid for an acquisition that's in excess of the acquired company's book value. The problem with a lot of goodwill on the balance sheet is that if the acquisition doesn't produce the value that was originally expected, then some of that goodwill might come off of the balance sheet, which could, in turn lead to the stock going downhill. Then again, acquisitions have to be judged on a case-by-case basis, as good companies are rarely purchased at or below book value.
For the reason discussed above, I generally don't like to see goodwill account for more than 20% of a company's total assets. Comcast reported $27.0B of goodwill on its most recent balance sheet, which accounts for 16.4% of assets. This is inline with the $26.9B that it reported in goodwill at the end of 2011, but higher than the $15.0B that reported at the end of 2010. This increase is due to the $10.9B in goodwill that was acquired in 2011 with the 51% stake in NBC Universal being purchased for a total consideration of $24.1B. Also contributing was the $982M in goodwill that was acquired when the company purchased the remaining 50% stake in Universal Orlando.
DirecTV reported $4.06B in goodwill on its most recent balance sheet. This in inline versus the $4.10B and $4.15B reported at the ends of 2011 and 2010, respectively. The small year-to-year changes here are attributed to foreign currency translation adjustments. In the case of DirecTV, goodwill accounts of 19.7% of assets.
Both of these companies have goodwill percentages of total assets that fall just below my 20% threshold, so I see no need to panic here for either company. However, I would be concerned more with Comcast, given the amount of goodwill that it added back in 2011 from its big acquisitions.
Intangible assets that are listed on the balance sheet include items such as licensed technology, patents, brand names, copyrights, and trademarks that have been purchased from someone else. They are listed on the balance sheet at their fair market values. Internally-developed intangible assets do not go on the balance sheet in order to keep companies from artificially inflating their net worth by slapping any old fantasy valuation onto their assets. Many intangible assets like patents have finite lives, over which their values are amortized. This amortization goes as annual subtractions from assets on the balance sheet and as charges to the income statement. If the company that you are researching has intangible assets, with finite lives, that represent a very large part of its total asset base, then you need to be aware that with time, those assets are going to go away, resulting in a reduction in net worth, which may result in a reduction in share price, unless those intangible assets are replaced with other assets.
Comcast currently has $77.2B in intangible assets. This is inline with the $77.6B that they reported at the end of 2011, but higher than the $63.3B that they reported at the end of 2010. This is due to the $14.6B in intangibles that they acquired in their NBC Universal purchase discussed earlier, and $591M in intangibles that were acquired in the purchase of Universal Orlando.
Their current intangible assets include $59B worth of franchise rights, which come from agreements with state and local authorities that allow access to homes and businesses in cable service areas that were acquired in business combinations. Franchise rights don't have finite lives, and hence, are not amortized from the balance sheet over time. The same can be said for the company's $3.1B worth of trade names that resulted from acquisitions. Of their finite-lived intangible assets, they have $11B that are attributed to acquired customer relationships, which will be amortized over a period of 18 years.
Intangible assets currently account for almost 47% of the company's total assets. This is not a good thing, even if the vast majority of the assets can't be lost to amortization. If their acquisitions from 2011 and before don't work out for whatever reason, what's stopping them from writing down the fair market values of those assets? This would have negative consequences on the company's financial condition, and possibly, the stock price as well. So, this is definitely an area that we need to watch for Comcast.
DirecTV reported $832M in intangible assets at the end of 2012, less than the $909M reported at the end of 2011, and the $1.07B that was reported at the end of 2010. These decreases are due to amortization. Apparently, they haven't made any acquisitions like Comcast has.
The intangible assets of DirecTV include orbital slots, which are positions of its satellites in space, as well as distribution agreements and trade names. The orbital slots are indefinite-lived assets, while the other intangibles have finite lives of anywhere from 5 to 20 years.
Given that intangible assets in total account for just 4% of DirecTV's total assets, I don't see anything to worry about here.
Return on Assets
The return on assets is simply a measure of the efficiency in which management is using the company's assets. It tells you how much earnings management is generating for every dollar of assets at its disposal. For the most part, the higher, the better, although lower returns due to large asset totals can serve as effective barriers to entry for would-be competitors. The formula for calculating return on assets looks like this:
Return on Assets = (Net Income) / (Total Assets).
For Comcast, the return on assets would be $5.25B in core earnings, divided by $165B in total assets. This gives a return on assets for 2012 of about 3.18%, which is rather uninspiring. This is pretty consistent with the 2.78% and 3.11% that the reported at the ends of 2011 and 2010. However, we should also keep in mind that the asset base of $165B, including the franchise rights, represents a strong barrier to entry for would-be competitors.
For DirecTV, the return on assets for 2012 was 14.3%, which is inline with the 14.2% and 12.3% that it reported at the ends of 2011 and 2010, respectively.
In the table below, you can see how the returns on assets of both companies have changed over the last couple of years. Clearly, Directv has superior returns on assets.
Table 2: Returns On Assets From Comcast and Directv
Short-Term Debt Versus Long-Term Debt
In general, you don't want to invest in a company that has a large amount of short-term debt when compared with the company's long-term debt. If the company in question has an exorbitant amount of debt due in the coming year, then there may be questions as to whether the company is prepared to handle it.
Comcast is carrying $2.38B in short-term debt, which should not be a problem for it with its levels of earnings and free cash flow. DirecTV is carrying $358M in short-term debt, and that shouldn't be a problem for them, relative to earnings.
Long-term debt is debt that is due more than a year from now. However, an excessive amount of it can be crippling in some cases. For this reason, the less of it, the better. Companies that have sustainable competitive advantages in their fields usually don't need much debt in order to finance their operations. Their earnings are usually enough to take care of that. A company should generally be able to pay off its long-term debt with 3-4 years' worth of earnings.
Right now, Comcast is carrying $38.1B of long-term debt, compared with the $37.9B reported at the end of 2011, and $29.6B that was reported at the end of 2010. Of the $38.1B in long-term debt, approximately $11B is due within the next five years, with the rest of it not due for another six years or more. The average interest rate on the long-term debt stands at about 5.60%.
DirecTV currently has $17.2B worth of long-term debt, versus $13.5B from one year ago, and $10.5B from the year before that. Of the $17.2B in long-term debt, $5.75B is due within the next five years, with rates ranging anywhere from 2.4% to 6.4%.
The table below illustrates the long-term debt figures for both companies and how they have changed over the last couple of years.
Table 3: Long-Term Debt At Comcast And Directv
In the case of both companies, long-term debt is rising, but especially more for Directv, which has seen a 64% rise in long-term debt over the last two years.
In determining how many years' worth of earnings it will take to pay off the long-term debt, I use the average of each company's core earnings over the last 3 years. The average earnings of Comcast over this period is $4.44B. The 3-year average for Directv is $2.60B. When you divide the long-term debt by the average earnings of each company, here is what we find.
Years of Earnings to Pay off LT Debt = LT Debt / Average Earnings
For Comcast, here is how it looks: $38.1B / $4.44B = 8.58 years
For Directv, it looks like this: $17.2B / $2.60B = 6.64 years
Neither one of these companies looks good in this department. It will take an amount that is equal to more than 8 years worth of earnings to pay off the long-term debt at Comcast, and more than 6 years at DirecTV. While most of the long-term debts don't come due until at least 2017, interest rates will probably be higher by that point, making refinancing a less attractive option than it is now, meaning that these companies will need to find a way to pay for this debt.
As far as who has the edge in this department, I don't like either one.
The debt-to-equity ratio is simply the total liabilities divided by the amount of shareholder equity. The lower this number, the better. Companies with sustainable competitive advantages can finance most of their operations with their earnings power rather than by debt, giving many of them a lower debt-to-equity ratio. I usually like to see companies with this ratio below 1.0, although some raise the bar (or lower the bar if you're playing limbo) with a maximum of 0.8. Let's see how Comcast and DirecTV stack up here.
Debt To Equity Ratio = Total Liabilities / Shareholder Equity
For Comcast, it looks like this: $115B / $49.4B = 2.33
The table below shows this figure for Comcast over the last couple of years.
Table 4: Debt-To-Equity Ratio At Comcast
You can see that the ratio is consistent with the year before, but has risen since 2010, due mostly to its acquisitions in 2011.
Here is the problem for DirecTV. The company has negative equity, because the liabilities exceed assets by more than $5.4B. For this reason, a debt-to-equity ratio cannot be calculated. This problem has gotten worse over the last couple of years for Directv. At the end of 2011, it had negative equity of $3.11B. At the end of 2010, it had negative equity of $194M. A lot of this can be attributed to the amount of long-term debt that the company has taken on over the last couple of years. It's also due to the fact that its retained earnings are headed in the wrong direction as well. I will get into that shortly.
While Comcast's debt-to-equity ratio doesn't look so hot here, I give it the edge over Directv in this department by default.
Return On Equity = Net Income / Shareholder Equity
Generally speaking, the higher this figure, the better. However, it can be misleading, as management can juice this figure by taking on lots of debt, reducing the equity. This is why the return on equity should be used in conjunction with other metrics when determining whether a stock makes a good investment. Also, it should be mentioned that some companies are so profitable that they don't need to retain their earnings, so they buy back stock, reducing the equity, making the return on equity higher than it really should be. Some of these companies even have negative equity on account of buybacks. However, Comcast is not one of these companies.
So, the return on equity for Comcast is as follows:
$5.25B / $49.4B = 10.6%
In the table below, you can see how the return on equity has fared over the past couple of years for Comcast.
Table 5: Returns On Equity At Comcast
At first glance, the returns on equity from Comcast are nothing to write home about, but it is moving in the right direction due to the fact that their earnings growth is outstripping their growth in equity.
Returns on equity for DirecTV cannot be calculated due to the company's negative equity position.
Retained earnings are earnings that management chooses to reinvest into the company as opposed to paying it out to shareholders through dividends or buybacks. It is simply calculated as:
Retained Earnings = Net Income - Dividend Payments - Stock Buybacks
On the balance sheet, retained earnings is an accumulated number, as it adds up the retained earnings from every year. Growth in this area means that the net worth of the company is growing. You generally want to see a strong growth rate in this area, especially if you're dealing with a growth stock that doesn't pay much in dividends or buybacks. More mature companies, however, tend to have lower growth rates in this area, as they are more likely to pay out higher dividends.
Comcast has $16.3B of retained earnings on its most recent balance sheet, while DirecTV has a retained earnings deficit of $9.21B on its balance sheet. Going back to the end of 2009, Comcast had retained earnings of $10.0B. So, over the last three years, Comcast grew its retained earnings at a cumulative rate of 63%, which is impressive. DirecTV on the other hand, increased its retained earnings deficit from $3.72B at the end of 2009 to $9.21B now. This deficit is due mostly to the aggressive share buyback policies being pursued by the management at Directv. Since 2006, the company has repurchased almost $26B worth of stock. With an authorization to repurchase another $4.0B worth of stock this year, it doesn't seem ready to slow down anytime soon. Since it doesn't seem to have the free cash flow or the earnings to support these buybacks, it has to resort to debt in order to finance these repurchases, and this will most likely hurt the shareholder in the long run.
The table below shows how the retained earnings at both companies have changed over the last couple of years.
Table 6: Retained Earnings At Comcast And Directv
So, as far as growth in retained earnings is concerned, Comcast definitely wins out here.
After reviewing the balance sheets of both Comcast and DirecTV, we see that both of these companies have their own sets of problems. Of the total assets on Comcast's balance sheet, nearly half of them are intangible assets. While most of them are indefinite-lived assets that can't be lost due to amortization, there is the possibility that the values may be written down if some of the acquisitions don't work out in the future, which could prove problematic. However, the franchise rights may serve as a strong barrier to entry to would-be competitors. The company also has a lot of long-term debt that will take nearly nine years worth of earnings to pay off, and its debt-to-equity ratio is rather high. However, the company has also shown improving returns on equity, excellent retained earnings growth, and a strong asset base that may present another barrier to entry for would-be competitors.
DirecTV shows superior returns on assets, but also, a lot of long-term debt that is equal to nearly seven years of the company's annual earnings, and still growing. The company also has a negative equity position, and a retained earnings deficit that is growing by leaps and bounds due to decisions being made by management.
While I'm not a big fan of either of these companies, I have to say that overall, Comcast has the better balance sheet.
To find out more about how I read financial statements, please visit my website at this link. It's a new site that I created for fun, as a way to help others make good investment decisions.
Thanks for reading and I look forward to your comments!