Comcast Shows No Fear

I told you earlier this week that Comcast (Nasdaq: CMCSA  ) might miss earnings estimates this time -- and that I didn't care. Management's business outlook was far more important, and deserved the lion's share of Fools' attention.

Well, the numbers are in, and the company didn't even miss Wall Street's targets. That means less distraction from the real story: the earnings call. Let's see what Comcast told us that we didn't already know.

Setting the stage
CEO Brian Roberts opened Comcast's recent conference call. He spoke favorably of the company's position, despite a double whammy of tougher competition and a soft economy. Roberts pointed to fantastic yet decelerating growth in revenue generating units (RGUs), and said that it was time to lower the capital expenditures of aggressive digital subscriber growth, returning instead to boosting free cash flow.

Most of the good stuff came from COO and Comcast Cable President Steve Burke. First, he explained the competitive situation in greater detail. In early 2006, Comcast's "triple play" offering had no direct competition, but phone companies like Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) soon caught on.

Through video services like Verizon's FiOS and AT&T's U-verse, or by teaming up with satellite providers like DirecTV (NYSE: DTV  ) or EchoStar's (Nasdaq: DISH  ) DISH Network, the telcos can now present triples of their own, and the game is on.

"Now it is clear that they are spending a lot more money," Steve said. "They're discounting more than before...bundling [land line] and satellite offers and launching two-product bundles that are getting some traction." On the other hand, the overlap between Comcast's service areas and Verizon FiOS is no more than 5% today, so the impact is a bit limited thus far.

The road ahead
Where Comcast has been pushing the full three-service solution pretty hard, the success of the new competition's two-service bundles has inspired the company to start marketing smaller packages -- voice and television, for example, or just TV service. Man, that's old-school. Other growth ideas include "the next evolution of triple play," which nobody cared to define further.

According to Steve, about 14% of all Comcast's video subscribers bought the whole three-service package. But there are other ways to bake a larger revenue pie, too: 61% of all video subscribers now have higher-margin digital cable, which provided 60% of the video segment's revenue growth. On top of that, a total of 40% of the 14.7 million digital customers have added DVR, high-definition programming, or on-demand services.

High-def services are a major growth opportunity for the cable industry today, but Brian said that it "continues to be a minority of television in this country by the vast proportion." That's why Comcast isn't too worried about DirecTV and others bragging on their HD station count. The company is converting analog channels with low viewership into high-def stations, one by one. There are also other ways to squeeze fat high-def channels into limited bandwidth, such as the switched digital video trials currently underway in Denver and New Jersey, or advanced MPEG-4 video compression, which calls for set-top boxes with more horsepower.

Foolish end credits
Long story short: Comcast looks healthy. The competition isn't so much other cable companies like Time Warner Cable (NYSE: TWC  ) or Shaw (NYSE: SJR  ) , because how often do you see them fighting over the same customers? No, these guys are facing a common threat from satellite and telecom operators, and they have many of the same competitive challenges and advantages. Comcast is simply the biggest of the bunch.

The company has a solid foundation, including strong finances, a massive customer base, and management with a focus on long-term performance. Yes, the new kids on the block will steal away some customers as their fiber networks and so forth spread out, but Comcast counters that by pumping more cash out of every customer. That includes stealing back some phone service accounts from the telecoms.

Comcast is a cash cow, and the cash flow should look even better in the near future, with the lower capital expense budget in place. Sure the company makes a few boneheaded moves, and it will have to fight hard for every dollar of growth, but it's eminently doable from this strong platform. If you're looking for hypergrowth, Comcast ain't it. But you might want to take a closer look in case your portfolio craves some dependable large-cap love, especially the kind trading near 52-week lows.

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