Comcast Corporation - Competition And High Expectations Limit Short-Term Potential

Oct.31.13 | About: Comcast Corporation (CMCSA)

Shares of Comcast Corporation (NASDAQ:CMCSA) saw a modest fall in the wake of its third quarter results. After witnessing solid momentum so far this year, investors are slightly cautious after the cable properties face increased competition, notably in video.

I see few triggers for further momentum this year, or early into 2014, prompting me to stay on the sidelines.

Third Quarter Results

Comcast generated third quarter revenues of $16.15 billion, down 2.4% on the year before, missing consensus estimates of $16.24 billion.

Reported operating income rose by 12.0% to $3.41 billion as net earnings came in at $1.73 billion.

Reported earnings totaled $0.65 per share, compared to earnings of $0.78 per share last year. Consensus estimates for third quarter earnings stood at $0.60 per share.

Excluding the gains on asset sales, earnings rose by $0.46 to $0.65 per share. Note that Comcast sold its share of SpectrumCo's wireless spectrum licenses.

CEO and Chairman Brian Roberts commented on the third quarter performance, "Our businesses generated strong revenue and cash flow growth and record free cash flow for the third quarter. Cable's results highlight the underlying strength of our residential and business services. We are driving innovation, expanding our service offerings, and bringing new and rich content to more platforms than ever before."

Looking Into The Results

While reported revenue growth appears weak, Comcast had tough comparisons with the Olympics in the comparable period last year. Note that the Olympics shaved off $1.2 billion in revenues on a comparable basis.

Total cable communication revenues were up by 5.2% to $10.49 billion, driven by high-speed internet and business services revenue growth. Comcast had net customer additions of 337,000 for its services, driven by 297,000 new customers for high-speed internet.

NBC Universal reported revenues of $5.85 billion, down 14.2% on the year before, but up 3.9% as adjusted for the Olympics.

Valuation

Comcast ended the third quarter with $1.60 billion in cash and equivalents. Total debt stands at $46.52 billion, for a net debt position of around $45 billion.

Revenues for the first nine months of the year came in at $47.73 billion, up 2.3% on the year before. While operating income showed healthy growth, lack of equity income and incidental income resulted in a net earnings decline. Reported GAAP earnings fell by 14.7% to $5.17 billion. Full year revenues could come in around $64 billion, as earnings could top at nearly $7 billion.

Trading around $47 per share, the market values Comcast's equity at $124 billion. This values equity in the firm at 1.9 times annual revenues and 17-18 times annual earnings.

Comcast currently pays a quarterly dividend of $0.195 per share, for an annual dividend yield of 1.6%.

Some Historical Perspective

For most of the past decade an investment in Comcast has been not so profitable and certainly not exciting. Shares rose from $20 in 2003 to highs around $30 in 2007. Note that shares fell back to levels approaching $10 during the 2009 financial crisis, but have seen a steady recovery ever since.

On the back of dividend increases and solid operational performance, shares are currently trading around all time highs of $48 per share.

Between 2009 and 2012, Comcast has increased its annual revenues by a cumulative 75% to $62.6 billion. Earnings rose by 70% to $6.2 billion, while Comcast managed to repurchase some 7% of its shares outstanding in the meantime.

Investment Thesis

So when excluding the impact of the Olympics, it seems that Comcast had quite a decent quarter. Excluding this, both the large cable operations and NBC showed real momentum, driven by popular shows such as "The Voice".

Note that earlier this year, Comcast bought the remaining 49% stake in its NBCUniversal joint venture from General Electric (NYSE:GE) for $16.7 billion.

Cable operations are growing through an increased customer base and higher rates. The company added 297,000 broadband subscribers, a bit less than the 305,000 anticipated by analysts. Comcast furthermore lost 129,000 video subscriptions which is a bit more than the anticipated 102,000 as competitors like AT&T (NYSE:T) are stepping up their game. This is amidst continued competition from Netflix (NASDAQ:NFLX).

However Comcast is not sitting still, as it now lets consumers watch as many as 35 channels live, on popular mobile devices. As Comcast now fully owns NBC it can easily offer out-of-home services given its strong bargaining position versus other channel owners.

In an attempt to offset declines in video subscriptions, Comcast promotes InternetPlus to consumers to sign up for broadband, while consumers get TV service, for $50 a month in the first year.

Almost exactly one year ago, I last took a look at Comcast's prospects. At the time I concluded that strong cash flow generation left room for a dividend hike. This hike came earlier this year as Comcast raised its quarterly dividend by 20% to $0.195 per share. Together with solid operating improvements and the buyout of GE with regards to NBC, shares have risen by roughly a quarter over the past year.

While I liked the cash flow generating capabilities of the business last year, I concluded to remain on the sidelines as I didn't see enough triggers for further gains. The buyout of NBC, the solid performance and the realization of the anticipated dividend hike acted as sufficient triggers in hindsight.

For now I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.