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April 30, 2009

Comcast Beats Across the Board to My Surprise

Comcast reported better than expected 1Q09 results pretty much across the board. I completely missed this as I had expected this to be the final quarter of sluggish growth with estimates coming down again. I underestimated Comcast's excellent operating management and favorable seasonal trends.

It was clear after Time Warner Cable (TWC) reported yesterday that big cable companies had a good quarter. Competition with telcos is fierce but rational and each side still is able to find growth drivers without severely damaging industry economics.

Comcast reported 5% revenue growth and 8% EBITDA growth, above my expectation for mid-single digit growth. Full year estimates may rise slightly though management did provide a note of caution with a statement that trends in March and April weakened vs. January and February.

Subscriber metrics were better than expected. Basic sub losses were modest, especially given big TV gains for the telcos in 1Q. High speed internet was much better than expected. Only telephony fell short although revenue growth for voice was over 30%.

Profitability is getting a boost as internet and voice economies of scale kick in across a a largely sunk network costs. Margins exceeded expectations, rising 120 basis points to a very healthy 40.9%.

The best news is continued growth in free cash flow driven by falling capital spending. Free cash flow grew 95% to $1.37 billion as overall spending dropped $200 million. As a percent of revenue, capital spending was just 13.1%, down form 17.1% in 2008 and 19.6% in 2007. Comcast plans to sue 2009 free cash flow to pay down debt given the unusual economic and credit market environment. However, the company is already below leverage target so assuming the economy is stable later this year a very large share repurchase is looming.

2Q faces seasonal headwinds along with the concern regarding slowing trends in March and April. This could limit further upside in Comcast shares following the strong run yesterday and this morning. However, with a big mea culpa from my blown preview of 1Q09, if Comcast can navigate the current environment and sustain mid single digit growth, the long-term value is the shares is higher. The key is maintaining free cash flow near 1Q levels.

I am not a buyer after the run but Comcast is back on my radar screen as a buy on weakness.

Posted by Steve Birenberg at April 30, 2009 09:05 AM in Comcast/Cable TV