An earnings beat is an earnings beat, regardless of how it happens. Once the dust settles, though, a company must still drive sustained growth to remain investment-worthy.
That's a potential problem for owners of Comcast (CMCSA 1.85%) stock. The cable and media giant topped sales and earnings expectations in the second quarter, reporting net income growth of nearly 5%. The bulk of that growth, however, came from two of its businesses that won't likely repeat the feat. Meanwhile, its core businesses continue to flounder.
What does this all mean for investors? Let's find out.
Q2 profit growth comes with a footnote
In Q2, Comcast turned $30.5 billion worth of revenue into net income of $4.2 billion ($1.13 per share), up from $30.0 billion in revenue and $3.2 billion ($0.76 per share) in net income a year prior. More importantly, those second-quarter numbers topped expectations for sales of $30.1 billion and earnings of $0.97 per share. Overall, earnings before interest, taxes, depreciation, and amortization (EBITDA) improved by around $400 million, from $9.8 billion to $10.2 billion.
The share price jumped in response to that news. That fiscal progress, however, came with a concerning footnote: Most of last quarter's profit growth came from the company's theme parks and its studio arm. Such growth is unlikely to continue.
Comcast's theatrical studio arm (Universal) collected $913 million worth of revenue in Q2, up 66% from the year-ago top line of $550 million. Strong showings from The Super Mario Bros. Movie and Fast X get the credit for that result. Total studio revenue reached $3.1 billion, though most of that came from its fairly consistent television business. Total studio EBITDA rolled in at $255 million last quarter, reversing the studio's small -- and rare -- loss of $3 million a year earlier. From that starting point, even modest profits were going to be a marked improvement.
The problem here is that although the studio unit's EBITDA is erratic, last quarter's figure of $255 million is in line with its long-term average. There's not much room for similarly big growth from here.
Data source: Comcast. Chart by author. Dollar figures are in millions.
As for the theme park unit, it produced EBITDA of $833 million on $2.2 billion worth of revenue last quarter versus $632 million and $1.8 billion, respectively, a year earlier. Just recognize that those latest results were unusually high, so the theme park unit may not be able to continue growing at this pace.
Data source: Comcast. Chart by author. Dollar figures in millions.
This should concern current and would-be shareholders for one simple reason -- these two businesses jointly accounted for $459 million worth of Q2's improved EBITDA, but company-wide EBITDA only grew $417 million last quarter. Most other operating units' bottom lines remained relatively flat or were even in outright decline.
| Division | Q2 2022 EBITDA | Q2 2023 EBITDA | Change |
|---|---|---|---|
| Residential Connectivity/Platforms | $6.73 billion | $7.02 billion | $291 million |
| Business Connectivity | $1.26 billion | $1.32 billion | $59 million |
| Media | $1.52 billion | $1.24 billion | ($280 million) |
| Studios | ($3 million) | $255 million | $258 million |
| Theme Parks | $632 million | $833 million | $201 million |
| Total | $9.83 billion | $10.24 billion | $417 million |
Data source: Comcast. YOY = year over year.
Yes, Comcast's connectivity and platform (broadband and cable) businesses also produced a reasonably healthy improvement in their collective EBITDA. That was partially tainted progress, though. Revenue for those businesses actually fell during the second quarter. It was just more than offset by lower operating costs; the company spent less on things like marketing, promotion, and technical support.
Moreover, its cable arm lost another 228,000 paying customers, while its broadband service also lost subscribers. That unit is simply shrinking and price-hiking its way to better profits. That's not a sustainable long-term plan.
Explore any other comparable option
Worries about Comcast's future are nothing new, of course. Its big cable television business has been fighting a losing battle for years. The growth of broadband business has been slowing down for some time, too. Realistic strategies to replace those former growth drivers with new ones remain unclear. Peacock isn't going to cut it.
Whatever the case, it needs to be understood that last quarter's bottom-line growth doesn't point to a new norm. Most of it stemmed from timing-based circumstances that won't be repeated.
Bottom line? Comcast stock is a great cash cow with a sustainable dividend. However, with a modest dividend yield of 2.5% at the current share price and little hope of inflation-beating payout increases in the foreseeable future, there are far better investment options out there.
