Is Comcast Corporation (CMCSA) Stock Rolling Over?

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The $2.3 million fine Comcast Corporation (NASDAQ:CMCSA) agreed to pay Oct. 11 highlights a growing problem for the company. I am both a customer and Comcast stock investor, so I know the Federal Communication Commission charge is accurate: I was told to change out my set-top box early this year, and when I finally complied, I was given one with a Digital Video Recorder. I have been charged for that service ever since. Comcast has been fighting FCC efforts to let me buy a different box.

Is Comcast Corporation (CMCSA) Stock Rolling Over?

This pushed bundling and accelerated pricing is common in the cable business, which needs to keep gaining revenue in order to pay increased carriage charges from cable broadcasters. The operators sometimes go to the mat against the broadcasters, but then almost inevitably cave.

Comcast has the advantage of being on both sides of the table in these negotiations. When NBC wants more money for cable channels like Bravo, CNBC or MSNBC, Comcast is negotiating with itself.

Is it time for that to change for Comcast stock holders’ sake, if nothing else?

Comcast Stock: Benefits and Risks of Vertical Integration

Most CMCSA shareholders today would say no, it’s not. Since the start of the year, Comcast stock is up 15%, while shares of Walt Disney Co (NYSE:DIS), which does not own its own delivery infrastructure, are down 13%.

This is not a common pattern, however. The five-year performances of the stocks are nearly identical. Over the last month, performance has been reverting closer to the mean, with both stocks down slightly. When the costs of the FCC fine are taken out of CMCSA shares, and it represents about half the cash Comcast had on-hand in June, Disney’s performance may start to pass it.

Comcast reports earnings on Oct. 26, and whispers are it will earn about $2.2 billion; 92 cents per share on revenues of $21.01 billion. If CMCSA expenses the fine, it’s hard to see that kind of performance continuing into Christmas.

Despite an exciting campaign, the most likely result of the November election remains in stasis, with Republicans running Congress and Democrats the White House. The FCC fine thus highlights a political risk to Comcast’s vertical integration strategy that is not likely to go away.

Time for a Comcast Corporation Split?

The problem with even contemplating a split between Comcast’s cable and entertainment assets is that the cable company may be its least attractive asset.

You can no longer compare Comcast cable with anything. The “cable group” now consists of Charter Communications, Inc. (NASDAQ:CHTR), which bought Time Warner Cable in May; Altice NV (OTCMKTS:ALLVF), a European-based roll-up of cable and phone companies that now owns Cablevision, and Comcast, which includes the NBC Universal programming assets.

But let’s try.

When Charter Communications bought Time Warner Cable and Bright House in May, for $79 billion, including $24 billion in debt, it acquired 13 million customer accounts. Therefore, it paid about $6,000 for each customer. At that rate, Comcast’s 22.3 million customers would be worth $134 billion — the company’s total market cap is $155 billion.

But there is no buyer for Comcast Cable at that price. Altice is highly leveraged and has a valuation of $20 billion. In theory, a deal might be done with AT&T Inc. (NYSE:T), but it is unlikely the government would approve it.

Another option to unlock value would be to spin out the entertainment assets, either directly or through a tracking stock. The resulting company would look a lot like a combination of CBS Corporation (NYSE:CBS) and Viacom, Inc. (NASDAQ:VIAB), which are worth a combined $38 billion.

But there is another way to unlock value.

Solving the Bigger Problem for CMCSA

Here’s the only reason to consider buying Comcast stock today. The company plans to offer a wireless service next year, based in large part on that cable infrastructure.

If that works in the market, if the wires can become the heart of a compelling wireless offering, then CMCSA might be able to do some deals. That will take time to prove.

Meanwhile, investors are left with the cable operator’s regulatory risks and declining wireline values. Hard to call that a buy. Maybe a weak hold.

Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time.  Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in DIS and CMCSA.

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Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/cmcsa-comcast-corporation-stock-rolling-over/.

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