Investors in Comcast Corporation (CMCSA) have a lot on their minds these days. On Tuesday, the company released a solid set of fourth-quarter results, while investors are looking for clues whether the company might join the race for Time Warner Cable (TWC).
Investors have already priced in the operational improvements and potential beneficial impact of industry consolidation, pushing up the valuation of the firm too much to my taste. The valuation at 20 times earnings is rich enough given the significant leverage position and long-term threats facing the business model.
I would be cautious and won't jump on the bandwagon at current levels.
Fourth Quarter Highlights
Comcast reported fourth-quarter revenues of $16.93 billion, up 6.2% on the year before, beating consensus estimates at $16.6 billion. Operating earnings advanced by 10.7% to $3.65 billion.
Net earnings attributable to common shareholders did see a big bounce on the back of lower income attributable to non-controlling interests. Net earnings rose by 26.0% to $1.91 billion, with earnings coming in at $0.72 per share.
Looking Into The Numbers
Reported revenue growth for the final quarter has been solid and was driven by the cable communications business which increased revenues by 5.2% to $10.66 billion.
Video showed 2.2% revenue growth to $5.12 billion as the company net gained 43,000 customers during the quarter. Note that for the past year Comcast still lost 305,000 customers, ending with 21.69 million video customers.
High-speed internet continues to do well, reporting an 8.7% increase in revenues to $2.65 billion. Net customers gains were 379,000 for the quarter and nearly 1.3 million for the year as Comcast ended the year with 20.66 million customers.
As usual business services continued to show healthy growth offset by lower advertising revenues, both of which are no surprise.
Combined, net addition growth across video, internet and voice were 649,000 for the quarter, marking net customer gains of 1.76 million for the year.
Revenues at NBC Universal have been very strong. Reported growth came in at 7.5% to $6.46 billion. Notably the broadcast television business performed well, showing double-digit revenue growth while growth at theme parks came in at 8.8%.
Review Of Last Year
In 2013, Comcast generated revenues of $65.7 billion which is up 3.3% as reported, and up 5.8% after adjusting for the difficult comparisons caused by the Super Bowl and the 2012 Summer Olympics.
The company showed healthy operating cash flows north of $14 billion. This is necessary because while the company operates with $5.3 billion in cash and equivalents, the total debt position has run up to nearly $48 billion.
Despite the significant leverage position, most certainly in absolute terms, the company pays out relatively large portions of its earnings back to shareholders. Comcast spent roughly $2 billion in dividends and a similar amount in share repurchases. This combined represented a nearly 60% payout ratio over earnings of $6.8 billion for the past year.
2014 Looks Even Better
Comcast is looking to increase the payouts to investors this year. The company plans repurchases worth $3 billion this year while it hiked its dividend by 15.4% to $0.225 per quarter. Combined, shareholder payouts are set to increase toward $5.5 billion this year as a result.
In combination with a current market capitalization of $140 billion, the total "yield" in terms of dividends and repurchases for this year is seen at 3.9%
The increased payouts come amidst optimism about sales growth and momentum fueled by customer additions. Notably NBC performed really strong, showing good ratings for key shows, as the company awaits the Sochi Olympics.
The fact that the company managed to gain 43,000 video subscribers, thereby ending 26 straight quarters of decline, is very hopeful as well. The X1 digital interface allows customers to store and watch TV on internet, also named "TV Everywhere," even from tablets and phones.
What About Time Warner Cable And Charter Communications?
During the conference call, nothing was mentioned about a possible involvement of the company in a potential deal surrounding Time Warner Cable, which is in "play" at the moment.
According to people familiar with the potential Charter Communications (CHTR) and Time Warner Cable deal, Comcast might get involved. It could buy cable assets in New York City, New England and North Carolina to get a hold of another 3 million customers. Such a potential deal could be valued at $16 billion.
Any potential deal between the two other cable companies would top $60 billion at least. If Charter were to acquire Time Warner with three times as many customers as the company itself, its customer base of 16 million would still be roughly three times as small as that of Comcast.
Perhaps a potential leveraged deal between the two smaller competitors is good for Comcast as the combination will not create a formidable competitor. This is especially true as a potential combination will be saddled with debt and if Comcast could acquire some of the assets at interesting prices.
A rumored $16 billion deal to acquire some of these assets as outlined above could push the net debt position of Comcast toward $60 billion. This is an astonishing amount, yet current growth and cash flows should be able to support the service of this leverage.
Takeaway For Investors
Investors in Comcast have seen very healthy returns, with shares increasing by some 35% since the summer. While the company has momentum going for itself, I am very hesitant to invest.
The company trades at 20-21 times last year's earnings, which is a bit steep despite the solid growth. Add to that the significant debt position and long-term uncertainty about the business model, and very high cost of service, and you can see my skepticism. Note that the internet will most certainly have the potential to disrupt large portions of the company's business model in the future.
Given these concerns outlined I remain cautious, especially after the strong momentum. While any deal activity could change the competitive landscape to some degree, the impact will be limited in my opinion.
I remain on the sidelines.