The Bull Case For Comcast (CMCSA)

Comcast Corp. is the largest cable operator in the US. Its shares have been down this year, and fell further after reporting “disappointing” 3rd quarter results. (In the “for what it’s worth” department, the company had beaten Wall Street’s expectations the previous 3 quarters.)

I stated in my last post that I purchased Comcast’s Class A Special stock (CMCSK/NASDAQ) on Monday (11/28), which closed that day at $26.73 a share. The 52-week high of $34.16 was reached on March 30 of this year and the 52-week low hit $25.57 earlier this month. The market capitalization is approximately $59.5 billion and the company trades at about 1.45 times book. There is no dividend.

Why Comcast is down

Like other cable companies, Comcast faces several risks. Investors have emphasized these risks when evaluating the company, and the share price has suffered as a result.

For starters, Comcast is losing basic cable subscribers while facing increased competition from telecommunications outfits like Verizon and SBC (soon to be renamed AT&T) as well as satellite companies (such as DirecTV Group, which I also own).

Comcast faces potentially higher programming costs. These are already the company’s largest single expense, and no matter how much it focuses on holding down costs, “must-have” content providers such as ESPN clearly possess negotiation advantages.

Comcast is also yet another family-controlled media company. CEO Brian Roberts, son of Chairman and Founder Ralph Roberts, controls 33% of the voting shares. The fact is that the Adelphia scandal has made family ownership a risk in and out itself for many investors.

And Comcast faces the constant threat of increased government regulation at all levels -- federal, state and local.

Finally, there is always the potential of new technologies being developed and disrupting the company’s business model.

What Comcast has going for it

Because of the above, Comcast stock is down. I believe that’s temporary and investors with a 3-5 year time horizon will be rewarded when buying the stock at current levels.
Even though the company is losing basic cable subscribers, its future is as a multi-system operator. Comcast lost 46,000 basic cable subscribers in the 3rd quarter (leaving it with 21.4 million) but added 437,000 high-speed data subscribers. In fact, its high-speed internet service exceeded $1 billion in the 3rd quarter. At 20% market penetration, this line of business has significant growth potential.

The company is also adding digital phone customers, though not as fast as Wall Street would like, gaining 12,000 in the quarter. It reaffirmed its target of 200,000 to 250,000 net additional digital phone subscribers by the end of 2005.

This brings up Comcast’s “disappointing” 3rd quarter results. The company reported a profit of $222 million, or 10 cents a share, roughly the same as the year before.

And revenue rose to $5.6 billion, matching or slightly exceeding what many analysts estimated, while cash flow climbed about 13% to $2.1 billion.

But higher programming costs stemming from its deal to televise National Hockey League games have caused Comcast to cut growth expectations for 2005. The company now expects 2005 cash flow growth of 13%, down from the previous range of 14% to 15%. And stronger demand for costlier set-up boxes is leading to higher capital expenditures -- up to $3.5 billion from the previous target of $3.2 billion to $3.3 billion.

So the company’s “disappointing” 3rd results were due to increased capital expenditures in 2005. I think there’s a good chance for Comcast to achieve substantial return over its cost of capital in 2006 and beyond.

In fact, CEO Brian Roberts runs this family-controlled company in the best interests of shareholders. He recently quipped that Comcast’s shares could be picked up at “going out of business sale” prices in the stock market. And he’s backing up his words with action: Comcast has been steadily repurchasing its shares and bought back about $752 million worth of its stock in the 3rd quarter alone.

Along with making strategic capital expenditures and aggressively buying back stock, Comcast targets growth through acquisitions. Examples include purchasing the cable and broadband operations of privately held Susquehanna Communications and acquiring (along with Time Warner) the assets bankrupt Adelphia earlier this year.

Bottom Line: Comcast is down largely as the result of a decade-long lull for cable operators. Yet the company has excellent management, is growing revenues and cash flow, and is experiencing strong demand for its menu of digital cable services. There are risks but I find Comcast attractive at current prices.

Note: I always encourage readers to do their own due diligence before buying something I’ve bought. That’s especially true here because there’s a lot more I haven’t touched on. Such as HDTV and video-on-demand (VOD), Comcast’s deals with CBS and Radio Shack, and the fact that a certain gentleman in Omaha has been purchasing more Comcast stock. So please read up on this company before buying.

Class A Special Stock: As stated above, I purchased Comcast’s Class A Special stock (symbol: CMCSK). They trade at a slight discount to the company’s Class A stock (symbol: CMCSA). The reason is that the Class A stock has voting rights while the Class A Special stock generally has no voting rights.