Welcome to the Stock of the Day!
Fall is known for football, the changing leaves and a fresh new lineup of television programming. So it’s a big time of year for cable companies like Comcast (CMCSA), which just reported earnings this morning. While CMCSA shares are down on a slight sales miss, could this be a good buying opportunity to pick up this “triple play” (earnings, dividends and stock buybacks) stock? Find out now.
Comcast, as you probably know, is a huge player in media, entertainment and communications. It is perhaps best known for Comcast Cable, which beats out Time Warner Cable (TWC) as the largest cable operator in the U.S., with over 22.3 million subscribers.
On top of this, the company is known for its “Triple Play” package, which also offers voice and high-speed internet services for residential and business customers. What many don’t realize is that Comcast also has a hand in the networks that it includes in its cable service, with full ownership of NBCUniversal and significant holdings in E! Entertainment, Style Network and G4, among others. 2013 has been a pivotal year for Comcast so the analyst community expects 27% bottom-line growth over 2012.
In the third quarter, Comcast’s cable business for both residential and commercial customers generated strong sales growth and record cash flow. At the same time, revenue for NBCUniversal decreased 14% compared with Q3 2012, a period of unusually high sales due to the 2012 Olympics. Overall, consolidated revenues declined 2.4% to $16.15 billion, just missing the $16.25 billion consensus estimate.
Meanwhile, adjusted net income advanced 38% to $1.73 billion, or 65 cents per share. Analysts were looking for earnings of 61 cents per share so Comcast posted a 7% earnings surprise. Investors reacted to the sales miss so shares are down this morning.
However, I’m encouraged by the company’s growth strategy. Comcast is ramping up capital expenditures on its network infrastructure and equipment. This should help the company continue to attract more new subscribers. In the past year the company has increased capital expenditures by 9.1% to $1.7 billion; over the same period, the number of video-internet-voice subscribers has jumped 15%.
I like that Comcast has been aggressively buying its stock back and shows no signs of slowing down. Last quarter, the company repurchased $500 million of its stock and it still has $2.0 billion remaining under its ongoing stock buyback program. Additionally, the company returned $512 million to shareholders in the form of dividends during the third quarter. Looking ahead, Comcast has an ex-dividend date coming up. Shareholders of record on January 2 will receive 19.5 cents per share on January 23. The stock currently yields over 1.7%, making CMCSA one of the highest yielding stocks in the industry.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. For much of the past year, CMCSA remained solidly in buy territory thanks to solid fundamentals (B-rated Fundamental Grade). However, in August institutional buying pressure deteriorated for this stock, indicating that the risk-to-return ratio for CMCSA was slipping. So I was compelled to downgrade it to a C-rated hold.
Even so, I like the company’s growth prospects, its hefty share repurchase program and that it is aggressively working to increase its subscriber base. I need to see buying pressure improve before I upgrade it again to a buy, but I’ll be taking a close look at the latest data over the weekend to see if it’s time to revise this recommendation.
As of this posting, October 30, I consider CMCSA a C-rated Hold.