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September 21, 2007

More Debate on Comcast

Following my post yesterday on Comcast, my buddy, hedge fund manager and soon to be anchor on the Fox Business Channel, Cody Willard, replied with a bearish view of the stock. Among Cody's objections to my ongoing bullish stance on Comcast is, "$14 billion of market cap losses for wasting tens of billions of shareholder dollars building centrally-controlling systems is still just the beginning, IMHO. The point is that the company is in a secular declining industry since its entire model remains centered on controlling what and how and where and why people consume video."

I am sorry Cody but I would hardly call it a waste of money to build a network that supplies cable TV to 24 million homes, broadband internet to 13 million homes, and telephone service to 3 million homes. These homes pay Comcast an average of $96 per month on which the company earns an EBITDA margin of 40%. Even with the high level of capital spending required to install new customers for each service and maintain the competitiveness of the network, Comcast is presently generating $2-3 billion of free cash flow....

....As for that secular decline, Comcast will add about 2 million broadband customers this year and another 7 million over the next four years. Telephony subs will grow by more than 3 million this year and for the foreseeable future. Those telephone customers produce the highest operating margins of any Comcast revenue stream. Small and mid-size business is a new opportunity that Comcast is just beginning to target and most observers think it can grow to a multibillion revenue opportunity over the next several years.

Sorry again Cody, but Comcast didn’t waste billions of dollars on a video system. They built the most advanced network available to US households (OK, Verizon might cover one-third of the homes Comcast does in five years), a network that is easy to upgrade, a network that has allowed the company to reduce its reliance on video subscribers to 60% of total revenue. It is that very network that allows the empowerment that you are so fond of. There is no empowerment without paying to get on a broadband network. Sure the video revenue stream faces challenges but not so many that loss of a moderate number of subs will lead to a downward spiral in revenues and profits. Remember, even video has growth elements as more subscribers take digital packages, buy video on demand, and receive interactive advertisements.

The market is not valuing Comcast's business correctly. There may be a little less value than I thought a few months ago but there is a lot more value than exists in today's stock price.

Posted by Steve Birenberg at September 21, 2007 01:14 PM in Comcast