Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

6-30-2010 CMCSA Covered Call

|Includes: Comcast Corporation (CMCSA)
JUNE 30, 2010 BY

1)      Date:6-30-2010

2)      Symbol: CMCSA

3)      Price: $17.62

4)      Shares Outstanding: 2,885 Million

5)      Market Cap: $51 Billion

6)      Book Value: $43,179 Billion

7)      Enterprise Value: $76,017 Billion

8)      EBITDA: $13,714 Billion

9)      EV/EBITDA: 5.54

10)   Earnings Per Share  2009:   $1.26            TTM 2010: $1.3

11)   P/E:  13.57     

12)    FCF         2009: $5,164 MM 2010 TTM: $5,790      

13)   FCF per share 2009: $1.79 FCF per share 2010 TTM: $2.006

14)   Return on Equity: 8.87%

15)   Return on Invested Capital: 5.07%

Investment Rationale:

Comcast is a leading provider of video, high-speed Internet and phone services (“cable services”), offering a variety of entertainment, information and communications services to residential and commercial customers. As of December 31, 2009, their cable systems served approximately 23.6 million video customers, 15.9 million high-speed Internet customers and 7.6 million phone customers and passed over 51.2 million homes and businesses in 39 states and the District of Columbia. The Cable segment generates approximately 95% of their consolidated revenue. Comcast’s Cable segment also includes the operations of their regional sports networks. Their Programming segment consists primarily of their consolidated national programming networks, E!, Golf Channel, VERSUS, G4 and Style.

Comcast’s other business interests include Comcast Interactive Media and Comcast Spectacor. Comcast Interactive Media develops and operates their Internet businesses, including, Fancast, the Platform, Fandango, Plaxo and DailyCandy. Comcast Spectacor owns two professional sports teams, the Philadelphia 76ers and the Philadelphia Flyers, and a large, multipurpose arena in Philadelphia, the Wachovia Center, and provides facilities management services, including food services, for sporting events, concerts and other events.

Comcast has quality competition from the likes of Verizon, AT&T, Time Warner Cable, etc. Because of their cost advantages in telephone and internet versus the incumbent fixed line operators, they have been able to steal business by lumping together cable, telephone, and internet access.  TV is their biggest business but it also has the lowest margins for them but as you can see from the first chart above the other businesses are growing faster. Over the last 5 years CMCSA has been spending aggressively to expand and maintain their infrastructure and investors grew increasingly frustrated that the company wasn’t returning the cash to shareholders.  The cable companies also were trading at much higher valuations 10 years ago, and due to the slowing growth in their businesses they have been revalued to far cheaper levels. CMCSA finally appears to be getting things right as lately they have been aggressively buying back shares at what we deem to be a significant discount to intrinsic value, and paying a smaller dividend. Their CAPEX spending has slowed down which has allowed for the company’s robust cash flow generation to show through.

At the current valuation CMCSA has a free cash flow yield of 11%. For a company that is well financed with a secure market position this is abnormally high and reflective of the low expectations for the company and the industry as a whole. We expect broadband demand to keep increasing and CMCSA is going to be the low cost provider in our opinion. Verizon’s FIOS platform is the most competitive but Verizon is not really infringing on too much of CMCSA’s territory, and we really question whether or not that whole endeavor will earn a high enough return for Verizon for them to keep plowing cash into it.

Comcast recently made a huge plunge into content with purchase of NBCU which will include the NBC network, USA, Bravo, CNBC, MSNBC, the Weather Channel, and the Sci Fi channel. It also includes assets such as their television stations, Universal Studios, etc. Comcast will be contributing their own cable networks to the joint venture. The deal terms are extremely attractive to CMCSA in that they placed a high valuation on CMCSA’s own cable networks and Comcast will have to fork over very little cash. We believe that the deal should generate solid future free cash flows, with a very low up-front cash outlay from CMCSA which will benefit shareholders as things materialize.

We believe that CMCSA is likely to grow by about 3-4% annually so by buying it at an 11% free cash flow yield we feel that it will be extremely difficult to lose money. Positive catalysts could be an aggressive share buyback, a higher dividend payout, or just investor realization of how cheap you can buy this tremendous company.

Investment Strategy:

Buy 100 CMCSA shares at $17.62

Sell 1 January 2011 20 CMCSA covered call for .89

Target Profit: $327

Maximum Risk: $1,673

Days Remaining: 205

Target Net on Cash: 19.5%

Annualized target net on cash: 34.5%

Break Even Price: $16.73

Target Price: $26.75 or at a 7.5% free cash flow yield

The covered call strategy maximizes our cash return because there is not an immediate catalyst on this investment, but instead it is just so cheap that it is impossible to ignore. If the call expires worthless which would mean that the market hasn’t realized the value CMCSA represents then we could always sell a call again later and we would benefit from the potential appreciation of the stock. We feel that at this level there is very little risk as defined by the permanent loss of capital.

Primary Risk Factors:

The biggest risk we see for CMCSA would be a value destructive acquisition which would tie up their cash flow.