Show Growth, Slow Growth, and Flow Growth
Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Growth is great. Earnings growth powers stock prices. Revenue growth is key to earnings growth. Equity growth is a strong predictor for future earnings growth. Most investors love those stocks that consistently demonstrate strong growth in earnings, revenue and equity. A lot of investors avoid stocks that don’t have rapid growth in those areas, but opportunities exist to capitalize on such stocks.
One stock among these that deserves investors’ attention is Comcast (NASDAQ: CMCSA). Let’s look at three ways that Comcast is growing that should result in good news for owners of its stock: “show” growth, slow growth and "flow" growth.
At first glance Comcast’s 47% revenue growth from 2010 to 2011 looks sizzling hot. 2012 Q1 revenue growth of 22.7% and earnings growth of 32.4% compared to the same quarter in 2011 are also impressive. However,like in Hollywood movies, not everything is as real as it first appears. Comcast’s foray into the world of show business has given it some “show” growth.
Comcast acquired a 51% controlling interest in NBC Universal in January 2011. General Electric (NYSE: GE), the previous owner of NBC Universal, still maintains a 49% interest in the company. This acquisition accounted for a sizable bump in revenues and earnings for Comcast in 2011 when compared to 2010. It also is reflected in the strong 2012 Q1 growth numbers. Using pro forma numbers that assume Comcast had the controlling interest in NBC Universal during all of 2011, the 2012 Q1 growth rates for revenues would be only 9.6% instead of 22.7%.
We shouldn’t discount the value of the NBC Universal acquisition, though. Take a look at the 2012 Q1 revenue growth for the operating units within NBC Universal.
The important thing to keep in mind is that the only portion of the revenues shown in the above chart that Comcast would have had without the NBC Universal deal is the Cable Networks unit. The revenue growth for this unit was 5.8%, barely ahead of the Theme Parks unit growth of 5.7%. Acquiring a majority interest in NBC Universal has given Comcast avenues for faster growth in the future in the Broadcast Television and Filmed Entertainment areas. Also, while Theme Parks had slower growth in Q1, the growth rate for this unit from 2010 to 2011 was over 24%.
Things seem to be looking up for the Peacock Network. After years of being trounced by the other networks, NBC now has some bona fide hit shows, led by The Voice. Universal Studios also has some potential blockbusters with the just-released Battleship and the upcoming Fast & Furious 6, Stretch Armstrong and The Bourne Legacy. These could give parent company Comcast a good kind of show growth.
The core of Comcast’s business is still in providing cable and internet services. The Cable Communications business segment accounts for 67% of total revenue for the company and 83% of operating income before depreciation and amortization. Slow growth in this business actually represents a great opportunity for the company. Why?
First, the number of customers for Comcast’s video business has decreased over the past few years. DirectTV (NASDAQ: DTV), by contrast, has grown its customer base and revenues by over 25% since 2009. DirectTV's growth has been largely at Comcast's expense. Any way that Comcast can grow revenues and earnings in the midst of such fierce competition will help the overall bottom line. The good news for investors in Comcast is that they have been somewhat successful.
As the chart above shows, Comcast is growing its customer base for digital video, high-speed Internet and voice. The increase in the number of customers using Comcast voice services (i.e., phone services) has been particularly strong. The bad news is that the growth rates have gone down nearly every year in all three areas.
One way Comcast is combating the declining growth rates is by focusing on its XFINITY video services. In particular, the company launched its Streampix video streaming service in February. Streampix represents Comcast’s effort to directly take on Netflix (NASDAQ: NFLX), which currently has over 21 million video streaming customers in the U.S. Comcast hopes to make it easy for its cable customers who currently use Netflix to switch to Streampix.
Another initiative underway is offering services for home security, home control and energy management. It is too early to know how these efforts will pay off, but even a moderate level of success will be beneficial.
Comcast also has one controversial weapon in its arsenal to drive revenue growth – usage based pricing for high-speed data services. As of now, the company is not moving forward with this option, probably in large part due to fears of a major backlash from customers. However, some think that it is inevitable that Comcast and other data providers will implement some type of usage based pricing. If the industry as a whole adopts this pricing model, Comcast would likely generate additional revenues to fuel its slow growth in Cable Communications.
Perhaps the most important growth Comcast is demonstrating is its “flow” growth – increasing cash flow. The chart below shows the solid trend in growing free cash flow.
This growth has handsomely benefitted shareholders over the past few years. Increased free cash flow enabled Comcast to raise its dividend by 40% in 2009, followed by 19% in 2011, then again by 44% in 2012. The forward dividend yield now stands at 2.3%.
Additionally, Comcast has used its cash to buy back shares. Earlier this year the company supplemented its share buyback authorization by $6.5B with plans to buy $3B in shares in 2012. This buyback reflects over 8% of the company’s current market cap.
The potential for lessened capital requirements for its cable business could help Comcast continue to accelerate generation of free cash flow. This could then allow the company to return even more to shareholders via dividend increases and share buybacks. Comcast’s flow growth is definitely good growth for investors.
Show + Slow + Flow = Go
Comcast shares have increased in price nearly 20% thus far in 2012. This increase comes in spite of relatively weak return on equity of 8.85% and a mature domestic cable market.
Comcast is earning investors' favor by focusing on its show growth/slow growth/flow growth strategy. The NBC Universal deal should continue to provide the company with additional pathways for increasing earnings. Comcast has a solid approach in place for slowly increasing revenues and earnings in its core cable communications business. Better yet, its steadily increasing free cash flow enables flexibility for further share buybacks and dividend increases - very good news for shareholders. Regardless of whether you like NBC’s TV shows or Universal’s movies, this stock is one to watch.
Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix. Motley Fool newsletter services recommend Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.