Buy Comcast Now Before Time-Warner Merger Is Final

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Comcast (CMCSA) is the world’s largest media corporation. Its revenue has soared from $38 billion in 2010 to $65 billion in 2013, making for a compounded annual growth rate (CAGR) of 20%! EPS has followed suit, growing from 1.29 to 2.56 on a fully diluted basis for a CAGR of nearly 26%. Comcast’s cable business is the driving force behind that growth account for over 60% of revenue and 80% of profits.

Comcast (CMCSA)

If regulators agree to let Comcast’s $45 billion bid to buy Time Warner Cable (TWC) go forward, Comcast would control nearly 36% of the U.S. high-speed internet market and 30% of the cable market. This would dwarf its closest rival, AT&T (T), which controls 18% of the high-speed internet market, and if its merger with Direct TV is approved, more than 25% of the cable market as well.

Comcast: Uncertainty About the TWC Deal

Although the above market numbers are impressive from an investor standpoint, the Federal Communications Commission (FCC) is concerned that this much control of the country’s internet and entertainment entryways may make for some unfair competition. Business rivals appear to be taking advantage of the situation, lobbying the FCC to control a common Comcast practice that ensures best pricing called the “most favored nation” clause that it puts in programmer’s contracts before they will consider offering its content to Comcast’s customers. A most-favored-nation clause ensures that if a programmer cuts a better deal with a competitor, they will receive the same deal.

Programmers hate them, as they believe it is harder to offer their content to new entrants, therefore hampering competition. The bargaining power of buyers as an input to industry rivalry and the impact it has on an individual company’s operations has been a pillar of business strategy since Michael Porter codified it at Harvard Business School in 1979.

But in the end, the fact that rivals are seeking to gain advantage by leveraging the TWC merger may be to Comcast’s advantage — it provides another point in which it can appease regulators while not relinquishing too much control. Face it, after the merger Comcast will still be the 500-pound gorilla in the room, and media providers will need their service to get their content to the masses.

Comcast has agreed to sell 1.4 million of TWC’s customers to Charter Communications (CHTR) and spin off 2.5 million more via a publicly traded entity after the close of the proposed merger. I am sure there will be additional horse-trading going on before the deal is done, but the likelihood of it being consummated is good.

Once integrated, a Comcast-TWC merger should produce significant cost synergies that will further increase cash flow and EPS.

Comcast: Good Fundamentals

The merger is not the only thing going for CMCSA stock. Comcast has produced solid fundamentals with great first-quarter results. In Q1, revenues were up to 14% from last year to $17.4 billion and EPS was 32% above last year to $0.71 per share. In the second quarter, Comcast’s profit rose 15%, driven by fewer video customer losses, increase in high-speed internet customers and higher profits from Comcast’s NBC Universal division.

Comcast: Solid Buy

The merger is anticipated to close in the beginning of 2015, but even without the merger, Comcast continues to produce strong operating results. Comcast’s stock is up 11.5% from April to $55.88 as of close on Monday. With analysts predicting a mean target price of $62 a share and the stock offering a 1.5% dividend to boot, CMCSA stock investors should take advantage of buying opportunities during market pullbacks.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Email him at kfick@piercethefog.com or follow him at www.piercethefog.com.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/buy-comcast-cmcsa-twc-merger/.

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