The cable business has always been a good one, and one particularly adept at generating cash flow. The great John Malone essentially pioneered the industry, and the model has always been the same: draw down debt to build out the system and acquire consumers and get them on regular subscriptions. The cash flow will be terrific and allow the company to refinance the debt at very cheap rates — which is why I like Comcast Corporation (NASDAQ:CMCSA) and Comcast stock.
Comcast stock has all the benefits and the disadvantages of being a cable business — one in which 80% of operating income comes from the cable side. There is gobs of cash flow and gobs of debt. Yet, financially, all is proceeding according to plan.
The Comcast Business Model
Things changed in the past 20 years, as cable distributors also went after content providers, such as when Comcast bought NBC-Universal. That has helped Comcast stock become more diversified, but it still needs a bit more diversification.
Its cable network subsidiary owns a bunch of solid, if unspectacular, channels including USA, MSNBC, E!, Syfy, CNBC, Bravo, NBC Sports, Golf Channel, Oxygen, Sprout, Esquire, Chiller, CNBC World, Universal HD and Cloo.
The cable network subsidiary generates about 14% of revenues and about one-sixth of all operating income.
Over at the broadcast TV subsidiary, we have the obvious: NBC and Spanish-language Telemundo bring in about 13% of revenues and just about 7% of operating income.
Comcast, because of the Universal and Dreamworks Animation purchases, also has a substantial studio business. As big as these operations are, particularly Universal, they only offer about 9% of revenues, and a mere 4% of operating income.
Thus, it is unsurprising to find that Comcast stock is only driven by an 8% revenue contribution and 3% operating income contribution from this segment.
The Whole Picture
When you add everything up, Comcast stock is supported by pretty great numbers. Net income for the trailing twelve months was almost $10 billion. This comes off of fiscal year 2016’s $8.7 billion. As mentioned, cash flow is what cable is all about and Comcast stock has terrific cash flow. Operating cash flow rose from $16.9 billion in FY14, to $18.8 billion in FY15, to $19.2 billion in FY16. That’s tremendous!
Free cash flow has been pretty stable at $9.5 billion. As operating cash flow increased, so did capital expenditure (capex). While debt is crazy high at $55.5 billion, and has been increasing, interest only costs about 5.5% annually. I would like to see more of that free cash flow, of which only $2.85 billion goes to dividends, used to pay down some of that debt.
Bottom Line on Comcast Stock
CMCSA stock is also reasonably valued, trading at 8.8 time enterprise value to EBITDA. Charter Communications, Inc. (NASDAQ:CHTR) trades at 10.1x EV/EBITDA, with even less cash flow and profit.
I think you’ve got a nice buy here with Comcast stock, but I would do a paired trade with The Walt Disney Company (NYSE:DIS).
Although unrelated, Disney has been a premier content provider for decades, and will be for generations to come. With the purchase of Twenty-First Century Fox, Inc. (NASDAQ:FOXA), it only solidifies its position. I think with these two stocks, you have the media coverage your portfolio needs.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
