A Stronger Signal at Comcast
By Tuna Amobi, CPA
With its November, 2002, acquisition of AT&T Broadband, Comcast became the U.S. cable industry's largest multiple service operator, or MSO. The deal more than doubled the number of customers for its analog video, digital video, high-speed Internet, and phone services to approximately 33 million. Comcast also owns a 57% majority stake in QVC Inc., the U.S. electronic retailer with fledgling operations in Europe and Japan, and it operates content and programming businesses through subsidiaries such as the E! Networks, Comcast-Spectacor, Comcast SportsNet, The Golf Channel, Outdoor Life Channel, and G4 Media.
The Philadelphia-based company posted particularly strong yearend financial results in early March, which S&P believes will act as a near-term catalyst for stock price gains. Its class A shares (CMCSA ), which are included in the S&P 500-stock index, carry Standard & Poor's highest investment ranking of 5 STARS (buy).
Recent results suggest to S&P that the AT&T Broadband integration is progressing according to plan, which is consistent with management's track record for prior acquisitions. As Comcast upgrades its systems to standardized specifications, S&P anticipates significant synergistic gains to be realized from the underperforming broadband assets acquired in the AT&T deal.
STALLED BREAD AND BUTTER.
High-speed data should remain Comcast's near-term cable "sweet spot," with the addition of 1.35 million net new subscribers projected for 2003 and 5 million total subscribers expected by yearend. Aided by popular offerings like video on demand and high-definition TV, Comcast's digital-video growth should also remain robust, with about 7.6 million customers expected by yearend after about 1 million net additions.
As for Comcast's bread and butter, its basic-service subscribers, early 2003 results suggest that the tide of recent losses may have stopped. We expect the count to be largely flat in 2003 at roughly 21 million. But telephony, while critical to the long-term viability of Comcast's strategy of offering bundled services, will likely see modest customer attrition in 2003.
S&P believes that Comcast is well positioned to meet maturing obligations on its $29.5 billion long-term debt, a load that's expected to be lightened in 2003 by a $2.1 billion cash payment from AOL Time Warner in connection with the restructuring of Time Warner Entertainment, and a related $1.2 billion in AOL stock that Comcast can monetize through a sale or disposal. Also, a possible buyout by Liberty Media (the minority QVC owner) of Comcast's QVC stake, should Comcast exercise its right of first refusal, could fetch nearly $7 billion for added debt paydown.
We estimate that Comcast will realize approximately $6.25 billion in pro forma EBITDA (earnings before interest, taxes, depreciation, and amortization) for 2003 from its cable business (as if the AT&T Broadband acquisition occurred at the beginning of 2002). Meanwhile, EBITDA margins for the combined companies should reach a percentage rate in the mid-30s (up from the mid- to high-20s in 2002) likely aided by aggressive rollouts of ancillary services, plus about $500 million in integration-related cost savings.
Comcast's total pro-forma revenues should grow in the high single-digit to low double-digit percentage range, with total EBITDA likely to advance more than 25%, to nearly $7 billion. Based on Standard & Poor's Core Earnings methodology, we estimate that Comcast sustained an S&P Core Earnings loss of 40 cents a share in 2002, which incorporates 15 cents of stock-option expenses. Assuming that 2003 cash flow (and operating earnings) will be near the breakeven mark, we estimate an S&P Core Earnings loss of 13 cents a share for Comcast in 2003, after 14 cents in stock-option expenses.
Investors do have some risk factors to consider: the potential for adverse regulatory rulings, uncertainties regarding the integration of AT&T Broadband, stiffened competition from direct broadcast satellite operators, a volatile advertising market, and heightened macroeconomic risk with the recent plunge in consumer confidence.
The stock is currently valued at about nine times enterprise value to estimated 2003 EBITDA, within the midrange of Comcast's MSO peer group. Based on prospects that it will soon achieve positive free cash flow, and with ongoing integration synergies, we believe Comcast deserves a conservative 20% premium multiple to its peer average. Thus, our 6- to 12-month target price range is $32 to $33, which represents a 15% to 18% appreciation from the recent price.
Analyst Amobi follows cable TV stocks for Standard & Poor's