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4 Reasons to Love the Cable Company

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many people complain that cable companies are profit hungry and that they don't deliver great customer service. However, there is a difference between disliking the service you receive from a company and actually leaving the service. Comcast (NASDAQ: CMCSA), in particular, has diversified itself away from just being a cable company into an entertainment powerhouse. There are a lot of reasons to dislike cable companies, but there are also many reasons to like their stocks.

Cord Cutting Is More Difficult Than You Think:

There is no question that people are leaving cable companies when it comes to video. The concept of cutting the cord has been reported about many times. However, cutting the cord isn't as easy as some think. While it's true that between Netflix, Hulu, and television web sites, customers can watch many of the shows they like, there are a few challenges.

In order to get a decent quality picture from Internet viewing you need a fast connection. Arguably the fastest connection is through your cable company. In my area, if you cancel your cable video subscription, your high-speed Internet bill goes up since you don't have both services. In addition, even if you found another route to get Internet service, getting real time sports video coverage is near impossible. Some would suggest switching to DirecTV or Dish Network, but these services are not available everywhere, and may require a contract that cable subscribers don't have to worry about. Long story short, leaving the cable company is much tougher than you might believe.

Entertainment Competition Is Fierce:

Comcast's other main division is NBCUniversal. This division owns NBC and other stations, plus the Universal Studios name. Comcast competes against the likes of Time Warner (NYSE: TWX) and their huge portfolio of brands. NBC faces off directly with the TBS and CNN brands, and in addition there is no question that NBC and CBS Corp (NYSE: CBS) go head to head each night. Walt Disney (NYSE: DIS) also is a direct competitor, with their ABC and ESPN networks. The biggest difference between these competitors is CBS is more of a straight broadcast television play, versus the other companies each having significant studio units as well. Ironically, CBS is expected to match Comcast's earnings growth over the next few years at 14%+, but I wonder if analysts fully appreciate the value of the other companies studio offerings. Take a look at the comparison of some of the feature films offered by the different studios over the next year:

<table> <tbody> <tr> <td> <p><strong>Comcast (Universal)</strong></p> </td> <td> <p><strong>Time Warner (Warner Bros.)</strong></p> </td> <td> <p><strong>Walt Disney (Disney, Pixar, Marvel, etc.)</strong></p> </td> </tr> <tr> <td> <p>Fast & Furious 6, Jurassic Park 3D, Despicable Me 2,</p> </td> <td> <p>The Hobbit, The Hangover III, Man of Steel</p> </td> <td> <p>Iron Man 3, Thor 2, Captain America 2, Avengers 2, Monsters University, Phineas & Ferb, and more </p> </td> </tr> </tbody> </table>

You can see that each studio has significant titles upcoming, but I would argue that Walt Disney has the superior lineup. As you can see, whether it's competition nightly on television or studios going head to head, Comcast has to be on top of its game.

Comcast Earnings:

Comcast reported earnings that were impressive no matter how you look at them. The company has two main divisions, Cable Communications and NBCUniversal. Though the benefit of the Olympics raised revenue and earnings, organic growth was still very good. Even excluding the benefit of the Olympics, revenue increased 7.1%, and adjusted EPS jumped 39.4%. The company's Cable Communications division showed 6.9% revenue growth, and NBCUniversal revenue increased by 8.3%. The company also improved its balance sheet, with cash and investments jumping from $1.67 billion to over $10 billion. Long-term debt was also cut by over $2 billion, representing a decrease of over 5%. Though these results are impressive, there are four other reasons to love Comcast.

Reason #1 – High-Speed Internet And Voice More Than Offset Video Losses:

The argument against owning cable companies is that they are losing Video subscribers. However, what investors might be missing is that these losses are being more than offset by other gains. The recent quarter is a great example of how Comcast is gaining business while losing Video subscribers. The company lost 117,000 Video subscribers, but gained in both Internet and Voice subscribers. High-Speed Internet subscribers increased by 287,000 and Voice subscribers increased by 123,000. The combination of these numbers indicates a net gain of 293,000 subscribers.

Reason #2 – NBCUniversal Diversifies The Company's Earnings And Income:

While Comcast will continue to face a battle to offset cable Video losses with Internet and Voice gains, NBCUniversal has nothing to do with this business. The company has a decent lineup of movies coming out against a relatively weak movie lineup this past year. The company's NBC channel is seeing good growth, and if the economy continues to improve the division's Universal Theme Park should benefit from stronger attendance.

Reason #3 – Free Cash Flow:

Comcast is generating a huge amount of cash flow. The company's operating cash flow increased 6.9% even without the benefit of the Olympics. Free cash flow was up 8.8% and this has been a consistent pattern. Whether you like the company or not, Comcast makes a lot of money selling its services.

Reason #4 – Potential Dividend Growth And Share Repurchases:

Maybe the most compelling reason to own Comcast is the possibility of dividend growth and share buybacks. The company generated enough free cash flow this last quarter that its dividend only used 29% of FCF. In addition, the company repurchased 22.9 million shares at an average cost of $32.75. When you consider that Comcast executed both of these actions, and still had money left over to improve its balance sheet, you can see the appeal of the company's shares.

Conclusion:

You may not love the company, but as we've seen there are multiple reasons to love the stock. With shares selling for about 16.5 times forward earnings projections, and expected EPS growth of 14.8%, investors might not see that much of a bargain. However, Comcast's cash flow changes the game. The company is growing its cable business, and NBCUniversal is a strong contributor as well. Comcast's commitment to repurchasing shares should help the stock longer-term. The low free cash flow payout ratio suggests the company can continue to raise its yield in the future. What better way to turn hate into love than to profit from your cable company's growth?


MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney and Time Warner. 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.

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