Unlike most other major media companies, cable leader Comcast's shares have risen more than 50% this year. But with a future that appears likely to be every bit as bright as its high-growth past, the company seemingly warrants continued careful attention.
As an investor, I find something comforting about owning shares in a company that has become the clear leader in its industry. That's especially true when the industry in question has staying power and is unlikely to go the way of, say, buggy whip makers or profitable U.S.-based automobile manufacturers.
Some of you, as you run a mental checklist of the positions in your portfolio that fit these criteria, may land on cable giant Comcast (Nasdaq: CMCSA ) . It's a company I've watched closely for the better part of the current decade, and I remain amazed at its growth, the innovative approach of its management, and -- until recently -- the relative disinterest accorded its shares.
Like Elvis, Comcast is effectively a child of Tupelo, Miss. The company's origins date from the 1963 purchase of a tiny 1,200-subscriber cable system there by a group headed by its still-active 86-year-old patriarch, Ralph Roberts. When I first began watching the company more than 35 years later, it served just more than 5 million cable customers, its high-speed data customer base was minuscule, and its telephony product was yet to come.
Today, the cable customer contingent easily leads the industry at more than 24 million, as does Comcast's 11-million-customer high-speed data group. It also serves more than 2 million telephone customers through its voice over Internet protocol product. On the content side, E! Entertainment, the Style Network, the Golf Channel, and VERSUS are just some of the names in its stable.
An underappreciated stock
But after being a market darling for most of the 1980s and 1990s, Comcast has, until this year, seen its shares essentially lie dormant for a five-year span. Since January, however, the company has been the belle of the big-media ball, with a share price that has climbed by more than 50%.
Why the lethargy between the early part of the decade and this year? I'd venture that there were several things at work. For instance, the industry's EBITDA approach to performance measurement -- a seemingly logical metric for companies with large amounts of plant-related depreciation -- didn't sit well with some investors amid accounting scandals that hit the telephone and cable groups hard. Also, the cable aggregation was shrunk like a sweater in hot water. Following a run of privatizations and financial shenanigans, the industry's public participation now consists only of the soon-to-be-spun-off cable unit of Time Warner (NYSE: TWX ) , smaller Mediacom, struggling Charter Communications, and of course Comcast.
Then there was concern about competition from satellite providers DirecTV (NYSE: DTV ) and EchoStar (Nasdaq: DISH ) and from the telephone companies, such as Verizon (NYSE: VZ ) , which is endeavoring to add video to its repertoire. The specter of that competition has hardly been eliminated, but the cable operators' ability to bundle video, data, and telephony has somewhat reduced the perceived threat from the satellite companies. And for their part, the telcos must spend mightily on infrastructure, while negotiating with all manner of local franchise authorities and simultaneously attempting to lock up programming deals.
This leaves cable with the size, mature plant, and developed products to serve customers immediately. Comcast's own triple-play offering of cable, data, and telephone is proving to be a significant attraction for customers, whose preference for one bill, versus a trio of smaller ones, benefits growth rates and also has a salutary effect on churn.
Recent growth at Comcast
The result was a third quarter at Comcast in which revenues were 22% higher year over year, and operating income jumped 46%. Beyond that, Chief Executive Officer Brian Roberts, Ralph's son, expects the current quarter to be at least the equal of its immediate predecessor.
Speaking of Roberts, I'll willingly advance the hosanna that he and his management team are as solid as any I've encountered, regardless of industry. While managerial competence is impossible to quantify and therefore to include in earnings models, I nevertheless believe it's easily the most important element in analyzing any company. I'd offer that the Comcast group is deep, strong, imaginative, careful, and just about any other appropriate adjective you'd like to contribute.
I also classify as inappropriate the criticism the group received a couple of years ago for considering an acquisition of Disney (NYSE: DIS ) . That skirmish was apparently Disney-induced, rather than the result of a foray by Roberts and his minions. In any event, the two companies continue to work well together and share ownership of E! Entertainment.
Possibilities for the future
What, then, does the future hold for Comcast? I'd argue that the company probably won't see its growth curtailed. With 558,000 new digital video subscribers having signed on last quarter, along with 536,000 data customers and 483,000 new telephony users, the company's financial metrics are also unlikely to sag.
There also seems to be at least the possibility that Roberts et al, who participated with a group that bought nearly $2.5 billion of wireless airspace licenses in the Federal Communications Commission's latest wireless spectrum auction, could initiate an acquisition of an existing cellular company. For instance, it doesn't appear ridiculous to think in terms of a buyout by Comcast of Sprint Nextel (NYSE: S ) , such that the triple play suddenly would become a quadruple play.
This, of course, is where it's also comforting to have a high regard for management: Such an acquisition would be a giant step, even for Comcast. But my observation of the company's progress since 2000 tells me that this team is unlikely to take steps -- giant or otherwise -- that will not benefit the company and its shareholders.
On a more fundamental level, I'd also look for continued enhancements to the company's current products. These could involve tweaking as basic as the recently announced redesign of the company's website, Comcast.com, or alliances like its pilot with Brinks Home Security to provide home phone and security technology in four test cities. The key is that, through continued innovation and improvements, the three bundled services as we know them today will likely be vastly more robust in the years to come.
Foolish bottom line
For now, Comcast is the only game in town for investors looking for a sizable, independent cable play. I therefore look forward to the emergence of Time Warner Cable as a separate entity sometime in early 2007. This second-largest cable operator will add to the profile of the space and probably benefit Comcast in the process.
A rediscovered Comcast is flying high once again. The question for those not sagacious or lucky enough to have moved into the stock earlier this year: Is there still money to be made in Comcast shares? I personally believe that the company's performance and its prospects continue to render it very interesting. I'm also convinced that it should at least be on the radar screen of Fools everywhere.
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