All I can say is, "Wow!"
It was an impressive 2004 for Comcast
Comcast has three business segments: cable, content, and corporate. We'll focus on cable, the heavy hitter, where yearly revenue grew 10%, from $17.5 billion to $19.3 billion. Many of its customers are paying $7 more per month -- comparing this most recent quarter with 2003's fourth quarter -- for upgraded services such as digital cable and broadband connectivity. And that's exactly what Comcast wants, so that it can generate returns on the investments it's made on such upgrades.
The beauty of these increased revenues is that they came with higher operating margins. The press release shows that cable revenues grew 10% while operating expenses and selling, general, and administrative expenses grew 6% and 8%, respectively. Like taking candy from a baby, Comcast pulled more money out of subscribers' wallets and dropped the cash right into the bottom line. Sweet!
For the year, Comcast generated $1.95 billion of free cash flow (net income, plus depreciation and amortization, minus capital expenditures). Increased operating margins accounted for 61% of the growth, and the bulk of the rest came from reduced capital expenditures. Sure, Comcast will have to maintain its network, but it shouldn't need as much cash to do that.
To me, it seems the company is clicking on all cylinders. Will it continue? I think so, and I think the growth will come from three places: continued upgrades in video, increased penetration of broadband, and the rollout of voice over Internet protocol. The table below shows the potential for growth in each area. Aside from percentages, the numbers are in millions.
|Type of service||Reach
(number of homes)
(percentage of all customers)
*VoIP will be launched in 2H 2005.
So why might Comcast be a good value today? Because it should generate a ton of free cash flow in the future. I calculate its enterprise value (market cap, plus debt, minus cash) to be $80 billion because I include $12.8 billion in long-term investments with the cash. For 2005, the company expects consolidated FCF growth of 35% to 40%. Working with the 37.5% midrange gives a forward enterprise value-to-free cash flow multiple -- basically a forward price-to-earnings-style multiple applied to the whole firm, rather than just the equity portion -- of 30. Although it may seem pricey, investors may do well by paying up for Comcast's quality.
For additional information about the cable industry, check out:
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