The Smartest Cable Guy on the Block

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Despite stories of consumers cutting the cord becoming more pervasive, cable companies continue to do well and some are even raising prices. This includes the largest cable company, Comcast (NASDAQ: CMCSA).

Shares of Comcast seem undervalued on a number of measures. Comcast recently acquired the 49% of NBCUniversal it did not already own from General Electric, which allows the company to create and distribute TV, movie, and park entertainment in addition to providing connectivity. While the acquisition is not without critics, as evidenced in this recent article in The Nation, it could potentially open a Pandora's box where every cable operator creates content and where content creators just offer their content directly online.

Comcast's cable business, which still contributes about two-thirds of revenues, is also still able to add new subscribers. Most of its cable offerings, including the "triple play" combo (featuring phone, Internet, and cable service), are experiencing healthy growth.

Fundamentals and valuations

Comcast has 2.1 billion class A shares, 494 million special class A shares, and 9.4 million class B shares outstanding for a market capitalization of about $110 billion. Class A shares are entitled to 0.1333 votes per share while Class B shares receive 15 votes per share. All of the company's Class B shares are held by the Roberts family, giving it a third of the voting power in the company.

Two major competitors of Comcast, Time Warner Cable (NYSE: TWC) and DIRECTV (NASDAQ: DTV), have 291 million and 559 million shares outstanding for a market capitalization of $33 billion and $35 billion, respectively. Below is a table comparing a number of valuation measures and fundamentals for these companies.

<table> <tbody> <tr> <td> </td> <td> <p><strong>CMCSA</strong></p> </td> <td> <p><strong>TWC</strong></p> </td> <td> <p><strong>DTV</strong></p> </td> </tr> <tr> <td> <p>Price-to-earnings (PE) '13 est.</p> </td> <td> <p>17.6</p> </td> <td> <p>17.7</p> </td> <td> <p>12.8</p> </td> </tr> <tr> <td> <p>PE-to-growth</p> </td> <td> <p>1.1</p> </td> <td> <p>0.9</p> </td> <td> <p>0.6</p> </td> </tr> <tr> <td> <p>Dividend yield</p> </td> <td> <p>1.9%</p> </td> <td> <p>2.3%</p> </td> <td> <p>0.0%</p> </td> </tr> <tr> <td> <p>Current ratio</p> </td> <td> <p>0.7%</p> </td> <td> <p>0.8%</p> </td> <td> <p>1.0%</p> </td> </tr> <tr> <td> <p>Operating margin</p> </td> <td> <p>19.8%</p> </td> <td> <p>36.6%</p> </td> <td> <p>25.5%</p> </td> </tr> <tr> <td> <p>Net additions of customer relationships (Q1 '13)</p> </td> <td> <p>584K</p> </td> <td> <p>-82K</p> </td> <td> <p>21K**</p> </td> </tr> <tr> <td> <p>Beta</p> </td> <td> <p>1.1</p> </td> <td> <p>0.7</p> </td> <td> <p>0.9</p> </td> </tr> <tr> <td> <p>Price-to-cash flow from operations</p> </td> <td> <p>7.4</p> </td> <td> <p>6</p> </td> <td> <p>6.5</p> </td> </tr> <tr> <td> <p>1-year total return*</p> </td> <td> <p>32%</p> </td> <td> <p>39%</p> </td> <td> <p>28%</p> </td> </tr> </tbody> </table>

* as of July 10, 2013.

** Only U.S. based.

Source: SEC filings, CapitalIQ, Thomson Reuters, author's calculations.

As seen on the table above, Comcast is able to add the most net customers by adding new high-speed Internet (433,000) and voice customers (211,000), though its video customers declined by 60,000 in the first quarter. The trend at Time Warner was similar, with video losing customers (due in part to increased competition from Verizon's FiOS in the New York market) but the net gain in high-speed Internet and voice was unable to make up for this loss. Surprisingly, DIRECTV added 21,000 new subscribers in the U.S. despite offering only video service.

In terms of valuation measures, Comcast is slightly more expensive than Time Warner Cable, which is well justified as Time Warner Cable provides mainly video, Internet and voice services. While DIRECTV is the least expensive company, it offers only TV service and does not pay a dividend. This last point is is especially important to the income-deprived investor due to record low bond yields.

All three companies also return capital to investors by repurchasing shares, and Comcast, Time Warner Cable, and DIRECTV repurchased shares worth $500 million, $660 million, and $1.4 billion, respectively in the first quarter of 2013. All three companies still have significant amounts remaining under their current share buyback authorizations as well.

Competitive positions

As mentioned earlier, Comcast was able to raise its prices for a number of its services including video and equipment as well as offer new services. As a result, the company's average revenue per cable, video and Internet customer increased by about 1% compared to the previous quarter, reaching $155, $77, and $43 respectively. Only voice revenue declined by about 1%, reaching about $30 per customer. In addition, Comcast's customers are increasingly installing equipment by themselves, with a 38% self-installation rate in the first quarter of 2013 as compared to a 24% self-installation rate in the first quarter of 2012. This increase in self-installation provides larger cost-saving opportunities to the company. Below is a table with some of Comcast, Time Warner Cable, and DIRECTV offerings and monthly prices (excludes promotions) in zip code 10020:

<table> <tbody> <tr> <td> </td> <td> <p><strong>CMCSA</strong></p> </td> <td> <p><strong>TWC</strong></p> </td> <td> <p><strong>DTV</strong></p> </td> </tr> <tr> <td> <p>Basic TV (most watched digital channels)</p> </td> <td> <p>$39.95</p> </td> <td> <p>$49.99</p> </td> <td> <p>$54.99</p> </td> </tr> <tr> <td> <p>Best TV bundle (includes premium channels and sports)</p> </td> <td> <p>$140.00</p> </td> <td> <p>$145.98</p> </td> <td> <p>$124.99</p> </td> </tr> <tr> <td> <p>Basic high-speed internet (up to 3 Mbps)</p> </td> <td> <p>$39.99</p> </td> <td> <p>$29.99</p> </td> <td> <p>n/a</p> </td> </tr> <tr> <td> <p>Basic triple play</p> </td> <td> <p>$99.99</p> </td> <td> <p>$129.99</p> </td> <td> <p>n/a</p> </td> </tr> </tbody> </table>

Source: company's web sites.

In addition to offering comparable prices to Time Warner Cable and DIRECTV, Comcast offers Xfinity home control service, allowing customers to monitor their homes and also potentially save on energy use. Comcast is also a leader in on-demand TV (offering on-demand shows from all TV networks) and in cloud-based TV, allowing subscribers to watch TV on their mobile devices. Additionally, Comcast, Time Warner Cable and DIRECTV have adopted TV Everywhere, allowing subscribers to watch current shows on multiple screens and devices. An increasing number of pay TV subscribers utilize TV Everywhere, and Comcast, Time Warner, DIRECTV and other paid TV operators are using technology such as this to monetize on-demand programming including integration with Nelson ratings.


It seems like cable companies are thriving despite threats from Internet companies such as Netflix, Hulu, YouTube and

Comcast is the largest cable company with an enterprise value of $150 billion. Time Warner Cable is half the size of Comcasts' cable segment and NBCUniversal is roughly comparable to Twenty-First Century Fox. If investors combine twice the value of Time Warner Cable ($56 billion x 2 = $112 billion) and the value of Fox ($76 billion), it gives an enterprise value of $188 billion, which is much more than the value of Comcast.

Based on the valuations of its peers, Comcast's market capitalization is $38 billion less than its market value. This simple calculation does not include the leverage Comcast derives from having combined cable, TV, and movie businesses in one company. With this and the factors discussed above, Comcast shares could significantly advance once the NBCUniversal acquisition is fully integrated.

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Delian Naydenov has no position in any stocks mentioned. The Motley Fool recommends DirecTV. 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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