« Dreamworks: Good Results Ahead of Kung Fu Panda | Main | Time Warner: So Bad It Might Be Getting Good »

May 06, 2008

Comcast Has Stabilized

Comcast reported good 1Q08 results. EPS matched estimates while revenue, EBITDA, and free cash flow exceeded estimates. Most subscriber metrics also beat estimates. Margins fell slightly as Comcast upped its marketing spending and began its aggressive rollout of service to small and mid-sized businesses.

Comcast's results closely paralleled those of Time Warner Cable. It appears that the cable industry has stabilized after a poor 2007. Both companies were able to accelerate subscriber growth with only a small sacrifice in margins. Both companies also saw stable capital spending. The mix of upper single digit revenue and EBITDA growth and stable capital spending means rapid growth in free cash flow. With both companies focused on returning cash to shareholders and investor expectations reset to a lower growth profile, the stocks should continue their recovery with additional upside of 10-15% possible in the near-term, especially if 2Q08 results, during the seasonally slow period, confirm the 1Q trends....

....In its Cable segment (95% of financial results), Comcast reported revenues of $7.916 billion and EBITDA of $3.142 billion versus consensus of $7.85 billion and $3.15 billion. Free cash flow grew 59% or $400 million. Capital expenditures were flat so that virtually all of the operating cash flow growth flowed to free cash flow. This is exactly the financial profile cable investors have been hoping for. In 2007, this model fell apart as revenue and operating cash flow growth decelerated and capital spending rose. If Comcast and the rest of the cable industry can sustain this performance for several more quarters substantial upside exists in the shares.

At the subscriber level, results were especially good. Comcast did lose basic subscribers (analog TV only). Basic subs fell 57,000 but this at the low end of expectations with several analysts looking for losses of 100,000 or more. Digital TV subs came in above most expectations at 494,000. High speed data had a big upside surprise with 492,000 net additions against expectations of 330,000. This performance reverses a recent series of disappointing high speed internet subscriber quarters. Stabilization in the housing impact, weak DSL performance by the telcos, and better marketing is helping. If these trends continue there is plenty of room for the telcos and cable to drive high speed data growth with neither industry suffering.

VOIP telephony additions were 639,000 also better than expected. While much is made of the loss of basic subscribers, Comcast added 11 times the number telephony subs than TV subs lost. I continue to ask why investors penalize cable so deeply for basic sub losses while giving telcos a pass.

Overall, Comcast reported exactly the type of quarter cable investors have been asking for since 2006. TWC, the #2 cable company, had similar results, suggesting that cable industry fundamentals have stabilized. The financial model is very attractive at the 1Q08 performance level. A few more quarters like this and cable valuations will head up, providing nice upside for shareholders even after the large gains the shares have enjoyed year to date.

2Q08 will be critical to determining the next big move in the stocks as it is seasonally weak creating risk that 1Q trends stall or reverse. An additional risk is that Comcast and the cable industry make a big play with major capital commitments to enter the wireless business. Surprisingly, the conference call had little questioning of management on its wireless plans.

Posted by Steve Birenberg at May 6, 2008 09:23 AM in Comcast/Cable TV