Over the last year, Comcast (CMCSA) stock performed in line with the S&P 500 Index; its involvement in a variety of takeover battles — for media conglomerate Twenty-First Century Fox (FOX.A) and Sky Broadcasting — deserves some of the blame for holding back these shares, notes Richard Moroney, editor of Dow Theory Forecasts.
Comcast butted heads with Disney (DIS) on both deals, and investors feared the winner would end up overpaying. That fear, along with continued concerns about cord-cutting, created a cloud over the stock.
The takeover fight resulted in a split decision — Disney walked away with most Fox assets, while Comcast paid approximately $40 billion for Sky. Comcast has been criticized in some corners for paying up for a legacy pay-TV business that seems vulnerable to the same cord-cutting issues impacting the U.S. cable business.
However, Comcast has shown an ability to maximize big deals — the transformative mergers with AT&T Broadband in 2002 and NBCUniversal in 2011 have been hugely successful. Plus, the addition of Sky gives Comcast a big footprint overseas and an additional 27 million households it can monetize.
Third-quarter results provided a lot of good news for shareholders:
* Adjusted per-share earnings rose more than 27% to $0.65, beating the consensus estimate by $0.04. Revenue increased 5% to $22.1 billion, versus an estimate of $21.8 billion.
* While Comcast lost 106,000 video customers during the quarter, the consensus called for a larger loss of 153,000, and the addition of 363,000 new high-speed internet customers eased the pain.
* Overall, customer relationships increased 3.4% to 30.1 million, with the company realizing its best broadband additions for a third quarter in 10 years. Broadband average revenue per user rose 4.5%, reflecting the company’s pricing power and demand for its products.
* The NBCUniversal business is putting on a strong show, with NBC fi nishing No. 1 in total viewers for the first time in 16 years. The network was also No. 1 with adults aged 18 to 49 for the fi fth consecutive season.
* The firm generated $3.1 billion in operating cash fl ow in the quarter, returning $2.1 billion to shareholders in dividends and share buybacks.
The addition of Sky expands Comcast’s customer relationships to more than 50 million, nearly doubles its broadband footprint, and triples the number of customer households it can reach, now nearly 200 million.
Both firms bring treasure troves of content to the merger, from Comcast’s television and film assets to Sky’s original content and coveted sports programming. Given the cost of Sky, Wall Street may have limited patience waiting for the payoff, but few can deny the size of the opportunity. Trading at less than 14 times 2019 earnings estimate, Comcast offers an appealing value.
