Comcast: Solid Media Play

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 |  About: Comcast Corporation (CMCSA), Includes: DIS, GE, NWS, VOD, VZ
by: George Liu

The Niche

Comcast Corporation (NASDAQ:CMCSA) is a $74 billion media conglomerate operating in the Services sector that provides entertainment, information, and communications products and services in the United States and internationally. It operates everything from television channels such as USA and CNBC to theme parks such as Universal Studios Hollywood. Comcast is the nation's biggest cable-TV operator; One of its biggest acquisitions was the January 2011 purchase of NBCUniversal from GE (NYSE:GE) for $27.3 billion. This move continues to prove to have been a successful venture; S&P Capital IQ recently noted that the $27.3 billion paid for NBCUniversal "seems like an even more attractive valuation" now.

Overview

Comcast Corporation has been in the headlines recently, soaring atop of a 14.5% YTD gain in its stock price. Hulu, which it co-owns along with The Walt Disney Company (NYSE:DIS) and News Corporation (NASDAQ:NWS), recently reported a 60% increase in revenues and announced it was starting a push into original programming in an attempt to attract more customers from Netflix. NBCUniversal, owned by Comcast, is also set to rack in a huge profit, approximately $250 million, from broadcasting the Superbowl matchup between the New England Patriots and New York Giants. Demand for Superbowl ad space has ballooned so much that insders note NBCUniversal could net as much as $10 million per commercial. This huge demand and the millions in profit for NBCUniversal has led to S&P Capital IQ recently reaffirming its buy rating on Comcast. Moreover, Comcast will benefit from its first free streaming of the Super Bowl, which will be accompanied by a different set of commercials, resulting in another stream of profit for Comcast.

However, Comcast has also faced some headwinds. The huge backlash over the SOPA bill, of which Comcast is a major advocate, could translate into negative publicity. Moreover, Comcast is facing political flak over its marketing alliance with Verizon Wireless, which is owned by Verizon Communications (NYSE:VZ) and Vodafone (NASDAQ:VOD). This marketing alliance solidified after Verizon spent nearly $4 billion to buy cable-tv airwaves from SpectrumCo, which Comcast owns 64% of. Senate Antitrust Subcommittee chair Herb Kohl has in turn scheduled a hearing on the deal and the alliance, while regulators such as the FCC are probing the Verizon-cable spectrum deals. Things are not looking bright for the marketing alliance, which, according to Macquarie Equities analyst Kevin Smithen, will most likely be cancelled by the FCC.

The Results

Comcast Corporation has sound fundamentals, although the results are hardly knockout. The average EPS growth of the last 3 quarters was 15%, while its 3Q EPS was up 6.5% year-over-year at 33 cents per share, falling short of analyst estimates of 39 cents per share. Comcast also reported a 4.9% increase in Q3 revenue on $14.34 billion, ahead of analysts' expectation of $14.25 billion. Year over year, quarterly revenue grew 51.1%, which crushed the industry average of 16.9%. Revenue at NBCUnversal increased 4.6% to $5.2B, while Comcast's cable network revenue rose 12% to $2.01 billion.

From a long term perspective, Comcast has an 18% 3-Year EPS Growth Rate and 4 consecutive years of annual EPS growth. Analysts expect the current fiscal year EPS to outperform last year's by 15.26%. Comcast also has a 3-Year Sales Growth Rate of 11%. These long-term figures paint a picture of steady growth and expansion of Comcast's operations.

Comcast has a healthy Annual Pre-Tax Margin of 16.2%, but its Annual ROE of 8.5% is somewhat low. Its Gross Margin (NYSE:TTM) is 52.92%, which beats the industry average of 48.08%, while its Operating Margin is 19.85%, which also beats the industry average of 15.14%.

It should be noted that Comcast's growth has been hampered by its 67% Debt/Equity Ratio. In fact, the major reason Comcast missed analyst EPS estimates was due to a $256 million year-over-year decline in investment income and higher interest expenses. Comcast has approximately $41B in debt on its balance sheet, which dwarfs the approximately $11.4B in cash and investments it has on hand. Investors should continue to be wary of this

The Verdict

Comcast is a very solid media play, but don't expect it to be posting huge returns anytime soon. Comcast is faring pretty well with analysts; none rate the stock as Underperform or Sell, and 23 out of 30 rank the stock as either a Strong Buy or a Buy. The consensus price target of the analysts is $32, which represents an approximately 20% upside. It will continue to reap the rewards of its NBCUniversal acquisition, and is poised to benefit handsomely from the advertising fervor surrounding this year's Super Bowl. Iinvestors should also stay updated on developments in the status of Comcast's marketing alliance with Verizon.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CMCSA over the next 72 hours.