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A multi-system operator, or MSO, is an operator that offers multiple cable or direct-broadcast television systems. MSOs are continuously looking to develop the next generation of set-top boxes. This will enable companies to enhance their existing product portfolios and should help them gain a higher market share. Subscribers are shifting away from cable TV and moving towards high-speed broadband videos. This forces MSOs to offer better technological services or watch their market share slip away.

Keeping this in mind, we are analyzing Comcast (CMCSA), one of the major media and technology companies worldwide. It has always attracted investors with its strong fundamentals and various strategies to gain future growth. Its price-to-earnings, or PE, multiple is around 16.5 times and its PE-to-growth ratio, or PEG, is 0.93, which signifies the stock's high growth potential. Let's discuss how this company will attract more investors with its strong fundamentals and distinctive strategies?

Joint Venture enhancing revenue generation capabilities

Recently, Comcast and Time Warner Cable (TWC) entered into a joint venture deal to form RDK Management, which will develop the standardized software for IP video set-top boxes, and triple-play devices that provide cable TV network and telephone services. This new venture will manage licenses, code, and community support of the Comcast Reference Design Kit, or RDK, software. Also, it will enhance the efficiency of its next-generation set-top boxes and benefit cable operators. Through this venture, these giants will develop and deploy RDK, enabling them to expand their network in North America, Europe, and Asia. At the same time, these companies are also providing technical support to more than 100 companies including Pace, Liberty Global (LBTYA), Charter Communications (CHTR), Broadcom (BRCM), and Intel (INTL).

Comcast will transfer all intellectual property rights and licenses related to its RDK components to this venture. The company developed RDK to power its hybrid set-top box "tru2way," triple-play devices, and speed up its next-generation video services. It will use RDK to upgrade its "X1 platform," which is a cloud-based technology integrating large video collections with social media features. The advanced X1 cable TV services will enhance its subscribers' TV experience in a smarter and more personalized manner than ever before, helping Comcast retain its 21% pay-TV market share in the U.S. This upgrade also enables it to raise the subscription fee, which will lead to higher revenue.

On other hand, Time Warner Cable will contribute additional technical solutions, codes, and help fund this venture with its free cash flow, or FCF, of $1.4 billion as of the first half of 2013 to grow this new entity. Time Warner is yet to deploy an IP video set-top box commercially, and this venture will offer it an opportunity to scale-up its IP capabilities. Also, RDK will strengthen its converged platform by supporting its data, voice, and video products and enabling it to develop superior IP set-top boxes. The company raised its 2013 FCF guidance to $2.5 billion compared to $2.47 last year, representing year-over-over FCF per share growth of 13.5% to $8.92 this year.

It is expected that Time Warner's partnership with Comcast will help strengthen its IP set-top box capabilities, which will enable it to attain its 2013 FCF guidance.

To read our detailed report on Time Warner, please click here.

Acquisition and partnership building strong fundamentals

In the last quarter, Comcast acquired the remaining 49% stake in NBCUniversal, or NBCU, from General Electric (GE) for $16.7 billion. Comcast considers the complete acquisition a smart move that should evade the fall in its pay-TV subscribers, as customers shift their focus towards high-speed Internet based video services. In the second quarter, NBCU reported year-over-year revenue growth of 9%, contributing nearly 37% to Comcast's revenue, and its EPS showed year-over-year growth of 30% to $0.65. Comcast is very optimistic about NBCU and increased its capital expenditure to $260 million compared to $104 million in the previous quarter.

According to Comcast's management, though NBCU has not performed well for many years, it possesses strong upside potential since it offers both programming and delivery services.

NBCU's big hits, "Fast & Furious 6" surpassed $500 million in worldwide box office sales and "Despicable Me 2" generated $400 million in the first two weeks. This helped its free cash flow grow by 25.4% year over year in the second quarter. Further, "America's Got Talent" and the return of its hit singing show "The Voice" are expected to contribute in the next quarter.

It has recently signed a five-year deal with Legendary Pictures, producer of big-budget blockbusters such as "The Dark knight" and "Man of Steel." Legendary plans to produce and develop a series of its own movies to target the "Fanboy audience." In this deal, Comcast will act as co-financer, and Legendary will co-finance some of NBCU films. Partnering with Legendary will offer Comcast greater opportunities, and it expects significant growth in its cash flow, which it may use for its buyback plan.

Valuation

Comcast's stock is hovering around $42 per share with an attractive Enterprise Value-to-Earnings before interest, taxes, depreciation, and amortization, or EV/EBITDA. This ratio represents the relationship between the company's market value, after adjusting for its cash balance and debt level, compared to its earning capacity. Its strong competitor DIRECTV (DTV) is little bit cheaper than Comcast and is currently trading at an EV multiple of 6.57.

Company

Market Cap

EV/EBITDA

Price-to-earnings

Expected EPS (next year)

PEG

Comcast

$110.30 billion

7.38

16.61

$2.82

0.91

DIRECTV

$31.93 billion

6.57

12.09

$5.73

1.03

Source: Finviz.com

Further, Comcast's low PEG ratio compared to DIRECTV represents a high growth potential for the stock and its ability to attract new investors, who are looking for higher growth prospects.

DIRECTV's strong EV multiple and strong cash flow of $1.24 billion in first-half of 2013 are prompting it to trade around $58 per share. Investors can view its frequent share buybacks as buying opportunity. It reported year-over-over EPS growth of 21% to $2.61 in the first half.

DIRECTV's 4.6% growth in average revenue per user, or ARPU, from its key U.S. markets and the strong subscriber growth of 6.25% in Latin America are the primary growth drivers. It is expected that DIRECTV will continue to grow its brand image in Latin America through "Sky Brasil," "Sky Mexico" and "PanAmericana," in which it holds the majority stakes. Additionally, its share repurchase program helped EPS to grow by 8% to $1.18 in the second quarter and should drive its EPS growth further by the end of this year.

Conclusion

In order to attract more subscribers and enhance its customers' portfolio, Comcast established a new venture with Time Warner cable. This is an important initiative to help maintain its pay-TV subscribers. Also, Comcast's 100% acquisition of NBCU enables it to build strong fundamentals, giving it a competitive edge among its peers. This makes us confident to suggest that investors should buy this stock with the long-term upside potential.

Source: Comcast: Should You Add More Of Its Stock At These Levels?