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Summary

  • The company's net income growth of 26% year-over-year exceeded that of the S&P 500, and greatly outperformed the media industry average.
  • The company's revenue growth has outpaced the industry average of 4.0%.
  • From an investment perspective, Comcast's trailing twelve months' P/E of 19.1 is still cheaper than the industry average P/E of 23.6.

When it comes to evaluating media companies, very few can compare to Comcast (NASDAQ:CMCSA), which, by revenue, is by far the largest mass media and communications company in the world. The company offers services to residential and commercial customers in 40 U.S. states and the District of Columbia. But given that Comcast just picked off Time Warner Cable (NYSE:TWC), it was clear that management wasn't satisfied with the company's success.

The all-stock transaction, which is worth $158.82 per share, brings together a combined 33 million subscribers. Over the past year, Time Warner Cable has had several suitors. Both Liberty Media (NASDAQ:LMCA) and Charter Communications (NASDAQ:CHTR) have come to the table with their own offers. But their proposals were rejected.

Comcast, on the other hand, stepped in and sealed the deal by offering an 11% premium to Time Warner's most recent closing price (at the time of the announcement). On Tuesday, when the media giant reports its first-quarter earnings results, management will be pressed about details of expected growth.

Analysts are expecting the company to book a profit of 64 cents a share, which would represent a 25% jump year-over-year. Last year, Comcast posted a profit of 51 cents per share. Analysts have grown more optimistic. Estimates have grown by a penny over the past three months. For the full fiscal year, analysts are expecting earnings of $2.85 per share, which also represents strong optimism. This implies a year-over-year profit growth of 11.3%. But the Street has every right to be confident.

Consider, in the most recent quarter, the company's net income growth of 26% year-over-year exceeded that of the S&P 500, and greatly outperformed the media industry average. Net income increased from $1.51 billion to $1.91 billion. Likewise, earnings per share soared close to 30% to 72 cents. This was after the company posted earnings of 56 per share in the same quarter a year ago.

Revenue, meanwhile, is expected to come in at $17.04 billion for the quarter, 11% above the year-earlier total of $15.31 billion. For the year, revenue is projected to roll in at $68.83 billion. After a slight 2% dip in the third quarter, revenue was up in the fourth quarter by 11%, $16.93 billion. In fact, the company's revenue growth has outpaced the industry average of 4.0%.

Recent revenues growth has been spurred by (among other things) a 5.2% increase for cable communications, which reached $10.7 billion in the January quarter, compared to $10.1 billion in the year-ago quarter. The growth was driven by increases of 8.7% in high-speed internet, 25.3% in business services and 2.3% in video.

All told, given the company's consist earnings growth, Comcast deserves the respect it has gotten. Over the past year, the stock is up close to 20%, while the S&P 500 has increased 17.9%. And the future direction of the stock suggests continued outperformance.

On Tuesday, the company will be pressed about the its impending deal for Time Warner, which will report its earnings two days later on Thursday April 24. Assuming that the deal is approved, which most industry expert expect, there are several synergies to present Comcast with even more value than it has already created.

One area is the combined company's retail business services, which had a market share of just over 6% in 2013. What's more, the combined companies will generated close to $6 billion in business services, which is expected to grow more than 20%. As it stands, the majority of analysts (88%) rate Comcast as a buy. This compares favorably to the analyst ratings of nine similar companies, which average 55% buys.

From an investment perspective, Comcast's trailing twelve months' P/E of 19.1 is still cheaper than the industry average P/E of 23.6. On a forward basis, the P/E drops to a more attractive 15, and is lower than its five-year average of 16.6. At $49 per share, the average target price is $61.07 per share that gives rise to an upside potential of 22.7%. But when adjusting for potential merger overlapping scenarios, I maintain a more conservative target of $55.

Source: Why Comcast Is Heading To $55