It's hard to believe that an industry with several multi-billion dollar companies could have one clear leader. However, that's exactly the situation in the entertainment industry. What is even more surprising is that this leader is Comcast (NASDAQ: CMCSA ) . The company that millions think of as their cable provider is bringing down the house when it comes to entertainment.
Owning the pipes and the content
The first reason to buy Comcast is that the company's structure is significantly different from its peers. Comcast owns the cable (or pipes in industry-speak) and the content, whereas its peers only create content. While companies like CBS (NYSE: CBS ) , Time Warner (NYSE: TWX ) , and Walt Disney (NYSE: DIS ) have excellent content libraries, only Comcast can deliver the content without help.
There might not be a clearer picture of the risk of not owning your content distribution than the recent fight between Time Warner Cable and CBS. The short version is, CBS didn't like the deal being offered by the cable company and the network blacked out, "its local TV stations in New York, Los Angeles, and Dallas." While the cable company said it experienced cancellations of service, you can bet that TV viewers in those areas were not too happy with CBS either. When two companies fight over money, customers rarely win.
Beyond the avoidance of potential problems with blackouts, one of the biggest benefits of owning the means to distribution is that this provides Comcast with higher margins. Just as an example, CBS and Disney both have operating margins of just over 22%, while Time Warner comes in at just over 20% . By comparison, Comcast's operating margin was a competition crushing 33%. If you are a Comcast shareholder, you have to love the cable company.
A $16.7 billion dollar steal
The second reason to buy Comcast is its NBCUniversal business. When Comcast announced earlier this year that it would buy the remainder of NBCUniversal from General Electric, this changed the "cable" company forever. Granted Comcast owned 51% of NBCUniversal and the plan was to buy out GE all along, but Comcast felt the timing was right to make this move earlier than expected.
While GE landed a cash windfall from the deal, Comcast gets complete control of the NBCUniversal business. This allows the company better control over the increase in programming costs from NBC, that otherwise would have to be passed along to consumers in the form of higher cable bills.
In the meantime, Comcast is proving that it knows how to run an entertainment business. In fact, the company's broadcasting division paced the industry in revenue growth last quarter. NBCUniversal's broadcasting revenue increased by more than 11% . Compared to a nearly 7% increase at Time Warner's TBS and TNT stations, flat revenue growth at Disney's ABC channel, and a 4% increase at CBS (excluding the NCAA tournament), you can see just how well this division of Comcast is performing..
Growth and potential future income? Sign me up!
The third and fourth reasons to buy Comcast are the company's future growth potential in both earnings and yield. Though analysts are frequently maligned for being wrong, more than 25 analysts have projections for Comcast earnings for 2013. As a group, they forecast superior earnings growth for the company in comparison with its competition.
Which would you rather own? You can choose from three different stocks that are expected to grow earnings by just over 12%, or you can choose a different stock that is expected to grow earnings by more than 18 %. If the choice isn't clear enough, consider this, Comcast is the only one that is expected to grow by more than 18%, and the stock sells for a forward P/E ratio that is within one of its three peers. Faster growth and a similar valuation should mean superior returns for shareholders.
When it comes to Comcast's yield, receiving a little more than 1.7% may not entice many investors. However, when you consider that none of Comcast's peers pay more than 2%, this yield seems reasonable. What should excite investors is that when the NBCUniversal deal was announced, Comcast felt comfortable enough to both raise the dividend and increase its share repurchase plan.
Considering that Comcast is only using about 16% of its core free cash flow (net income + depreciation – capital expenditures) on dividend payments, investors may see dividend increases in the future.
In the end, what you get with Comcast is a high-margin cable business, a growing entertainment business, and a company that generates tons of cash. Smart investors should see the universal appeal of this stock.
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