From addressing fickle market desires to significant competition, media is exposed to a great deal of uncertainty. With that said, the fundamentals in some firms like Cablevision (CVC) and Time Warner (TWX) are better than what the market acknowledges. Smaller firms like MDU Communications (OTC:MDTV) and New Frontier Media (NOOF) also have strong fundamentals waiting to be appreciated on the Street. In this article, I will run you through my DCF analysis on Comcast (CMCSA) and then, to increase confidence, triangulate the result with an exit multiple calculation and a review of the fundamentals compared to Cablevision and Time Warner.
First, let's begin with an assumption about revenues. Comcast ended FY2011 with $55.8B in revenue, which represented a 47.2% gain off of the preceding year - well above normalized organic levels. Analysts model a 13.8% per annum growth rate over the next few years. This will underperform the S&P 500's expected per annum growth rate of 10.3% over the same time period.
Moving onto the cost-side of the equation, we find that Comcast has isolated expenses to just a few items: cost of good sold, "COGS", taxes, and capital expenditures. I model that COGS will eat 63% of revenue over the next few years - roughly around the historical 3-year average level. Capex is estimated the same way, so I assume 13% of revenue.
We then need to subtract out net increases in working capital: we model accounts receivables as 5% of revenue and accrued expenses as 8.7% of revenue. Adjusting for depreciation and amortization, free cash flow comes out to around $13B by 2017.
Taking a perpetual growth rate of 1.5% and discounting backwards by a WACC of 10% yields a conservative fair value figure of $33.92, implying 14.9% upside. This is on top of a 2.2% dividend yield. It also underestimates potential, since media companies should be expected to have a long-term growth rate higher than the broader market. But, for the sake of being safe, I like to keep the assumptions conservative.
All of this falls under the context of impressive quarterly results:
"And based on all of that, we're very pleased today to be increasing our dividend by 44% to $0.65 per share on an annual basis and that our board has approved a new $6.5 billion stock buyback program under which we plan to increase our repurchases of stock by 40% to $3 billion this year. Now the way we come to those conclusions of the optimism and good feelings we have about the company is based on the financial results …
Cable, which had an outstanding year, capped by a great fourth quarter of improving customer metrics combined with healthy financial results. In the fourth quarter, Video customer losses declined to 17,000, our best quarterly Video performance in almost 5 years. And for the full year, we reduced Video customer losses by nearly 40%. We also added 336,000 High-Speed Internet customers in the quarter, a 15% increase and marked the sixth year in a row of adding more than 1 million high-speed data customers".
From a multiples perspective, Comcast is more expensive than its peers. It trades at a respective 19.6x and 13.7x past and forward earnings versus 14.1x and 11.2x for Cablevision and 13.8x and 10.3x for Time Warner. Assuming a multiple of 14x for Comcast and a conservative 2013 EPS of $2.13, the rough intrinsic value of the stock is $34.08 - roughly in-line with the result of my DCF model.
Consensus estimates for Cablevision's EPS forecast that it will grow by 8.7% to $1.12 in 2012 and then by 24.1% and 32.4% in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $1.36, the rough intrinsic value of the stock is $19.04, implying 34.9% upside.
As I speculated earlier, Cablevision could be taken over by the Dolan family. Having realized exceptionally profitable cable operations, management remains committed to dividend increases and buyback activity. Time Warner is also worthy of an investment considering stellar execution. Fourth quarter results were strong with Turner's licensing fees gaining 16% y-o-y and overall EPS beating consensus by 8%. Accordingly, I prefer investments in Cablevision and Time Warner over Comcast for now.