Did Comcast Get a Bargain Deal?
Comcast was already off to a strong start this week before it announced its fourth-quarter earnings. The company made headlines on Monday when it announced that it would be acquiring the remaining 49% of NBC Universal owned by GE. The $16.7 billion acquisition put Comcast even deeper into the entertainment-manufacturing spotlight -- well beyond its original role as a content distributor. Now, as the company has closed out its fiscal 2012 and treads into the new year as an even bigger conglomerate, let's take a look at its new wholly owned subsidiary and at whether this company, riding a 52-week high, could still be undervalued looking ahead.
Cheap at 15 times earnings?
It may sting some value-oriented investors to see Comcast trading at 15 times one-year forward earnings. But some believe that the company's staggered acquisition of NBC Universal, which first took place in 2011 with a $13.8 billion, 51% stake, was a bargain, even with Monday's $16.7 billion addition. Comcast currently values NBC Universal at just over $39 billion. This is up substantially from two years ago, when Comcast found the entertainment company to be worth $37.5 billion. Universal is not the strongest studio right now, but fortunes could change with greater investment and a capable content team. Also, if the NBC network is able to return to its glory days (it used to be the top network, with uber-hits such as Friends), this could substantially boost the value of the company as well.
Some analysts believe NBC Universal is worth beyond $40 billion, especially with Comcast's management announcing it will boost capital expenditures for the subsidiary by 25% with the focus on improving theme parks (Universal Studios has been a strong source of growth for the company lately) and network content creation.
The network turnaround is already a couple of years in process. According to a Bloomberg article, NBC Universal CEO Stephen Burke said his No. 1 priority was improving the network. For most of the time elapsed since then, NBC has lagged behind its peers in ratings. Yet in a surprising turn of events last fall, NBC zoomed to No. 1. If the trend continues, investors should have faith in Burke's management talents for the network going forward. Burke recently said in an interview that, "The broadcast business continues to seem like a big opportunity for us." The company is expecting low double-digit gains in fee revenue for its broadcasts.
NBC Universal may be the most compelling part of the company in terms of valuation, but Comcast as a whole has been doing well across the board.
For the fourth quarter of 2012, Comcast saw net income rise 18% to $1.52 billion. Sales were up, though less dramatically, to $15.9 billion. The cable business is a laggard for the company as a net of 7,000 subscribers left its services. This is not a scenario unique to Comcast, as is there is a nationwide trend of leaving cable in favor of satellite television or streaming options.
With that favoritism toward Internet, however, comes a big boom for Comcast. Net subscriber additions for high-speed Internet were 341,000 for the company. This topped analyst estimates.
The company increased its dividend and committed to a $2 billion share buyback as well.
Comcast is a unique play in its space at the moment, as it has taken a zig where others have zagged. Competitors such as Time Warner and its affiliate Time Warner Cable, as well as Cablevision, have been adamant about separating content creation from distribution.
Comcast management is convinced that these two need not be separated and that they can actually add value to each other.
As far as valuation goes, Comcast currently sits between Time Warner Cable and Cablevision in terms of forward P/E, but given its growth prospects and the new acquisition, I am tempted to think that Comcast may be the most attractively priced pick of the bunch.
Of course, investors should only buy in industries in which they are confident. Media businesses can swing wildly, especially one that is closely married to the popularity of its content.
For a look at former NBC parent, GE, read here
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