The Company You Hate Could be a Great Investment

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

Investors need to be able to separate what they hear in the news media, from what is actually going on at the company itself. How many headlines have cried that customers are canceling their cable subscriptions in favor of services like Netflix, Amazon Prime, Hulu, and more? Here's the problem with these dire predictions, cable companies are not only surviving, they are actually doing pretty well. A prime example of a company with a proverbial target on its back is Comcast ).

Cutting The Cord Isn't As Easy As It Seems
Since a large portion of Comcast's business is tied to cable services, it only makes sense to determine if this “cutting the cord” phenomenon is a real problem. When it comes to cutting out primary television channels, you could make the argument that a digital antenna would do the trick. This may give the customer access to Comcast's NBC channel, CBS (NYSE: CBS), and Walt Disney's (NYSE: DIS) ABC lineup. However, if customers want sports coverage from ESPN they are out of luck. If they want premium channels like Time Warner's (NYSE: TWX) HBO, or CBS' Showtime network they won't have that option either. 

I know that some would say they can get a lot of shows on services like Netflix, Amazon Prime, and Hulu. However, each of these services all have one thing in common, you need a good high-speed Internet connection. For this connection, there are basically two choices, cable Internet or the telephone company's DSL or FiOS offerings. Since cable and telephone companies know they are the two big fish in an otherwise empty pond, pricing isn't significantly different at the same connection speeds.

Where does this leave the cable company? Honestly,it means that many people who try to cut the cord end up having high-speed Internet from the cable company anyway. Since most cable companies charge a higher price for high-speed Internet if you have no video service, in many cases this idea just doesn't make sense.

A Unique Competitive Advantage
In the recently announced deal between Comcast and General Electric, Comcast will acquire the 49% of NBCUniversal it didn't already own. Comcast said they mainly sped up the purchase of this asset due to bullishness around the prospects of NBCUniversal. The company backed this up by also raising their dividend 20%, and announcing a $2 billion share repurchase plan. Comcast will have a distinct advantage of owning the “pipes” and the content. 

Comcast's nearest competitor Time Warner can't claim this since they split the Time Warner Cable company into a separate entity. While CBS has excellent content, and Walt Disney has iconic brands, neither of these companies own their own distribution either.

Impressive Growth, But They Can Do Better
Comcast's growth in earnings has been nothing short of surprising. The company reported adjusted EPS up 10.6%, and analysts are calling for better than 16% EPS growth going forward. Relatively speaking, Time Warner and CBS outperformed Comcast with 24.47% and 19% EPS growth in their respective quarters. Walt Disney lagged the industry with EPS down 1.25%, but this was due to difficult comparisons because of strength in their film division last year. 

Part of the reason that Time Warner and CBS outperformed Comcast has to do with their respective operating margins. In the current quarter, both Time Warner and CBS reported operating margins of over 24%. By comparison, Comcast's margin was 20.67%, which only beat out Walt Disney at 18.54%. However, Comcast's previously mentioned acquisition of NBCUniversal should help improve margins going forward.

One big challenge that Comcast will need to overcome is their relatively weak upcoming film release schedule for 2013. In 2012, Comcast had the benefit of Les Miserables and Pitch Perfect. This year, the “big” hits are Fast and Furious 6, Despicable Me 2, and Kick-Ass 2. While these films may do well, they will have a hard time competing with the huge releases due out from Time Warner's Warner Bros. Studio and Walt Disney.

In 2013, Warner Bros. has arguably the strongest movie release list with names like The Hobbit, Man of Steel, and the 300 prequel. Disney also has a strong calendar with names like Monsters University, and sequels to Iron Man and Thor.

Still One Of The Best Values
Even with challenges in the film division, Comcast looks particularly attractive at current prices. The company yields almost 2% with their dividend increase, which is just less than Time Warner at 2.2%. Relatively speaking, CBS and Disney's yields of 1.1% and 1.4% just can't compete. When it comes to earnings growth, analysts expect Comcast to lead the industry at over 16%, compared to about 12% at Time Warner and CBS, and 11% at Disney. While Comcast does carry the highest P/E ratio at 16.7, this is still very close to their competition with forward P/E ratios between 14 and 15.7. 

The bottom line is, Comcast will own the pipes and content, their cable business is strong, and they are generating a massive amount of cash flow. If they can ramp up their film offerings, the company could surprise to the upside. I know it's easy to hate the cable company, but it's hard to ignore the value this stock represents. Investors would be wise to add CMCSA to their personalized Watchlist to keep up with results.

MHenage has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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