Is Comcast Corporation Irresistible?

After reporting a stronger-than-anticipated earnings release for its fourth quarter, is Comcast simply irresistible for the Foolish investor's portfolio, or is Charter Communications a better prospect?

Apr 25, 2014 at 8:09PM

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Source: Comcast. 

After reporting revenue and earnings results that blew away expectations on April 22, shares of Comcast (NASDAQ:CMCSA) rose just 2% to close at $50.83. In spite of Mr. Market's timid response to the company's results, the underlying business looks strong and there is a possibility that it could be a far better prospect than Charter Communications (NASDAQ:CHTR). This might be especially true after the company completes its acquisition of Time Warner Cable (NYSE:TWC).

Comcast crushed forecasts
For the quarter, Comcast reported revenue of $17.41 billion. Although this is only slightly higher than the $17.04 billion investors wanted to see, it represents a 14% gain compared to the $15.31 billion the business enjoyed in the same quarter last year. Even after excluding the $1.1 billion Comcast earned from the Olympics, its 6.5% revenue growth rate is impressive for a $109 billion company.

In addition to benefiting from the Olympics, Comcast's management team attributed the company's performance to both its Cable Communications and NBCUniversal operations. Excluding the positive impact of the company's Olympics-related revenue, NBCUniversal grew its top line by 8%, while the company's larger Cable Communications segment grew revenue by a modest 1%.

 

In terms of profits, Comcast did even better. For the quarter, the company reported earnings per share of $0.71. On top of being $0.07 above what Mr. Market hoped expected, the company's results were 31% higher than the $0.54 management reported in the same quarter last year.

In part, this was due to the company's higher revenue, but it can also be chalked up to a general decline in expenses in relation to sales. The business's other operating and administrative expenses fell from 29.2% of sales to 27.3%. This, in conjunction with other drops in cost, was partially offset by Comcast's programming and production expenses, which rose from 30.5% of sales to 33.9%.

Can Comcast keep turning up the heat?
In its continuous search for growth, Comcast decided it would be advantageous to acquire Time Warner Cable. In a deal that consisted of both cash and stock, Comcast initially valued Time Warner Cable at approximately $45.2 billion. While this may seem like an outrageous purchase price, it does add $22.1 billion in revenue and $2 billion in net income to its coffers. This would, effectively, allow Comcast to increase its lead over rival Charter Communications.

Between 2010 and 2013, Comcast has been a tremendous growth machine. Over this four-year period, the telecommunications giant saw its revenue jump a whopping 70% from $37.9 billion to $64.7 billion, while its net income soared 88% from $3.6 billion to $6.8 billion. Although this is an impressive improvement, it's important to consider that about $14.5 billion of the $17.9 billion increase in Comcast's revenue between 2010 and 2011 was attributable to its increased 51% stake in NBCUniversal that year.

CMCSA Revenue (Annual) Chart

Comcast revenue data by YCharts.

In contrast, Charter wasn't close. Over the same timeframe, Charter's revenue increased only 16% from $7.1 billion to $8.2 billion. Unlike Comcast, Charter did not engage in any significant transactions over that four-year period and relied, instead, on organic growth. Charter also saw some improvements in its profitability, but the business still couldn't turn a profit. In 2013, the business reported a net loss of $169 million, an improvement on the $237 million the business lost in 2010.

Foolish takeaway
It's hard to argue that Comcast is anything but a phenomenal growth story. In spite of mediocre organic growth, the company's use of M&A activity to grow its revenue seems to be paying off. If its deal with Time Warner Cable goes through, investors should expect even more top and bottom line gains, while Charter should continue to struggle. This could present the Foolish investor with a very attractive prospect and warrants further research.

Your cable company is scared, but you can get rich
Right now, there are a lot of businesses vying for a place where you might not have expected it; your living room!  Of these businesses, one of the biggest is Comcast, but is it the opportunity that will make you rich or are there better prospects for the Foolish investor?

You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 

Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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