|Shares Out. (in M):||2,500||P/E||15||14|
|Market Cap (in M):||147,000||P/FCF||15||14|
|Net Debt (in M):||48,000||EBIT||0||0|
Current Price: $58
Target Case Price: $85 in 12 months
Downside Case Price: $52
Market Cap: $147B
Liquidity: $815MM per day or 14.5MM shares
CMCSA is a lightly regulated emerging monopoly, selling a non-cyclical product, presently growing EBITDA 5-8% per year, trading 15x 2015 adjusted FCF without a deal and 13.5x PF 2015 FCF with a TWC deal. In the near term (6-12 month), I do not anticipate acceleration in CMCSA’s current trends, particularly during the FCC/DOJ review of TWC/CHTR deal. However, longer term, as demand for higher speed/volume internet access increases, CMCSA’s structural advantages versus satellite, wireless, and wireline will become more and more dominant, leaving CMCSA with a monopoly position across 70% of its portfolio and a duopoly in the 30% where a credible fiber competitor exists/will exist. As CMCSA’s cost base is largely fixed, price increases and increased market penetration will yield revenue and EBITDA growth well in excess of Street estimates. Further, CMCSA has growth opportunities in Wi-Fi mesh networks, business services, NBCU, home security, etc. Given the minimal cyclicality and predictability of current trends plus eventual higher growth, I feel at least an 18x FCF multiple is warranted.
Less formally, I think the market is underestimating odds of TWC deal, underestimating pricing and household penetration rates, and still views cable companies as the cash sucking, overbuilders they were in the previous decades instead of what they are today… consumer staples with monopoly pricing power that will only get stronger.
Of the “close to sure bets” in the world, I think Americans wanting higher speed access is one of them and CMCSA/cable best positioned to take advantage of that.
• Target Case – TWC Deal – Assuming a normalized 13% capex/sales ratio for cable business and 2% for NBCU, I reach $4.00 in PF 2015 FCF, which grows to $5 in 2017. Applying 18x 2017 FCF, discounting back one year at 10%, and giving $4/share in value to “other” assets (Greatland Spinco, CHTR stake), I reach a value of $85.
o I am sure the terms of the CMCSA/TWC/CHTR deal will inevitably be reworked. No one gives the regulators their best offer first. However, the math of “around $5 in 2017 FCF” should stand.
• Target Case – No Deal – If regulators completely block the deal, CMCSA should earn $3.80 in 2015 FCF and $4.20 next year. 18x yields $68.
• Downside Case – With no deal and CMCSA’s EBITDA growth slows towards 2-3%, 2015 FCF could be $3.50 and 2016 $3.75. 15x 2015 and 13.5x 2016 yields $52.
o This corresponds with the bottom of CMCSA’s trading range.
• Regulatory Changes – The FCC has recently changed the regulations regulating US cable to give the FCC more authority over cable. While a burden, so far the FCC is only attempting to enforce the same net neutrality rules that governed the industry until Jan 2014, which include no price controls.. However, over the long term and CMCSA’s monopoly becomes clearer, it is possible the FCC steps up oversight.
o I’d point out that the scenario where CMCSA flexes its pricing power muscles to the point of FCC intervention implies a much higher earnings base than CMCSA currently…
• New Technologies – The primary driver of CMCSA/cable’s competitive positioning is that it is the best way to deliver data to homes. While remote at present, the emergence of a better technology is always a threat.
• Fiber Buildouts – If someone builds out a competitive fiber offering (Verizon, AT&T, Google, municipalities, etc.), cable’s monopoly would become a duopoly as fiber and cable are essentially the same. However, this is extremely costly, which is why I doubt a serious national fiber rollout ever occurs.
o I estimate a $40-$60B cost to build out fiber across CMCSA’s monopoly markets, or about half the EV of CMCSA excluding NBCU
Fundamentally, CMCSA is a transportation business – data transport. What drives a transportation business is demand is end market demand for the goods it transports and the supply of comparable quality transit options, adjusted for price elasticity. Since residential internet access emerged in the 1980s and 1990s, demand for data speed (or more accurately volume) has increased every year at an often exponential pace. While browsing, streaming, and of course cable TV are the major drivers of current demand, advances in cloud computing, VPN, the Internet of Things, etc. will only increase demand for high quality, high speed internet access. Importantly, this demand is largely non-cyclical and “mission critical” for consumers. Internet access is a “must have” for those accustomed to using it; lose your job, you probably use at home internet more than you did with one. At home entertainment, cable, Netflix, or otherwise, is the best value proposition around; there’s a reason 99% of homes have at least on television, passing the household penetration of microwaves, stoves, dishwashers, washing machines, and coffee makers.
On the supply side, there are currently four mass market methods of data supply – cable, copper telephone lines, satellite, and wireless. Satellite and wireless at present are completely un price competitive for large volume consumption. For example, watching 2-3 hours a day of streaming HD video would cost approximately $5,000 a month on current pricing, versus $50-$70 for cable. Without a step change in technology, it is doubtful satellite or wireless will reach price competitiveness. Copper telephone lines can be used for DSL, which at sub 5mbps download speeds can be provide roughly the same internet service as cable. However, 1) even getting to 5mbps requires expensive upgrades that telephone companies are reluctant to do and 2) copper wiring really can't go >5mbps in most areas. The telephone companies basically need to build out an entire fiber network, which is extremely costly. That's why you see the large telephone companies, T and VZ, dumping their existing copper wireline businesses at 3.7x EBITDA to roll up phone companies, FTR CTL WIN, who don't even have the cash to theoretically build out fiber. Hence, if you believe most homes will want >5mbps internet access – or more bluntly, to watch streaming HD on one TV – you believe CMCSA will have a monopoly position without a step change in technology that at present does not exist.
The one obvious exception to this “data transport” theory is satellite TV, which is comparable to cable TV. However, satellite is incapable of offering competitive internet or phone, has a lower quality VOD offering (requires broadband internet anyways), and can be affected by weather, resulting in an overall lower quality product. Over time, I expect satellite to continue bleeding share in TV, but the cable TV side of CMCSA business is lower quality (though still pretty decent) than internet.
High Speed Internet Penetration
One key driver of differentiation of my view versus the Street is penetration of homes passed. Essentially, CMCSA and other cable companies roll cable to all homes in a neighborhood, and each additional one that signs up is extremely high margin - say 85% excluding set top box costs. At present, high speed internet is taken by ~40% of homes passed. Most sell side models expect penetration to tick up to mid-40s by say 2020 with margins ticking up slightly, if they model out that far. While I don’t have an exceptionally strong view on pace, 1) that seems too slow, 2) I expect margins to improve substantially overtime as penetration increases (and DSL becomes less and less competitive), and 3) I fully expect high speed internet to eventually be ubiquitous in areas where it is available. A 70-80% penetration rate, depending upon pricing, is not crazy. Many European countries are there at present. While the price of high speed internet access, and not wanting to see price controls, may limit where CMCSA takes penetration, I fully expect a broadband internet connect connection to be as ubiquitous as a phone line over time. Do we really think only 43% of Americans will be watching Netflix or HBO in HD quality streaming a decade from now?
No discussion of cable these days would be complete without mentioning the new Title II rules from the FCC. Essentially, the FCC has voted to give itself more power to regulate cable (gotta love the ability to vote yourself into power). The big fear is that one day the FCC will look to set prices for cable. However, again “at present”, absolutely no one in a position to matter is calling for that. What has happened is that after political posturing and grandstanding, we have enacted a huge regulatory change to result in exactly the same rules that governed cable prior to January 2014. That's why the stocks have rallied since then. Over time, I fully expect the FCC to move towards price controls as cable will be a monopoly. It's just that I think it's 10-20 years out and that CMCSA will compound at a 20-30% pace until then.
Cable Fears Overblown
Another common fear is that the shift from linear TV to streaming OTT products will destroy CMCSA’s cable TV business. I have three thoughts. First, OTT streaming products, particularly in HD quality of better, require a broadband internet connection. If cord cutting does emerge, it quickly ensures cable’s monopoly/duopoly on internet. Second, to make up for lost revenues on the TV business, cable companies will look to charge higher volume customers, much like wireless companies do. Third, the bundled TV package is actually a huge value proposition to customers. The average American watches 4-5 hours of TV per day. Assuming a family of four and a $50 opening price point, that works out to 8.3 cents an hour to get cable TV. There's really no better value option for consumers, which is why you've seen the streaming OTT services grow with much cord cutting. Further, the Xfinity App is actually a better product than NFLX or Amazon Prime. If CMCSA and other cable businesses had gotten a quality app to market in 2009 instead of 2013, NFLX would be “that out of business DVD company.”
As this has been written about extensively elsewhere, I will keep this brief. I put the odds of a deal at >70%. The recent news about CHTR looking to buy Brighthouse, which has a shared ownership/operations with TWC, is a bullish sign for the deal completing. It could be part of the concessions the government demands. Legally, there's very little reason to block the deal. CMCSA and TWC really have no overlap and keeping them separate will have little impact on customers. In fact, greater scale gives CMCSA leverage to push back on networks, which could drive lower prices. Politically, it's become a circus. I'll leave it at that.
Most importantly, CMCSA is cheap even if deal doesn't go through.
Other Growth Opportunities
CMCSA owns a huge network across it's markets with growing importance as more data is demanded. There are numerous potential ways to increase that networks monetization. Home security is basically a motion sensor connected to the internet with a call center. CMCSA can build out fiber to business centers and high rises and target SMB and enterprise customers. They have built out a wifi network in major cities and could provide a cell phone service using their the network. They can build fiber out to cell towers and provide back haul for carriers. While the bulk of CMCSAs growth comes from internet and TV, there are dozens of interesting growth opportunities to further monetize CMCSA’s existing network.
Finalizing TWC deal. Earnings beats.
|Subject||Re: Risks/Competitive Threats ?s|
|Entry||03/15/2015 06:30 PM|
Fixed wireless is way off from being price competitive, and with present technology most doubt there'd even be enough spectrum to handle it.
Similarly, there could always be a new technogy that comes along and makes copper better. But the trouble is the vopper wires aren't particularly think and the signal degrades too fast over long distances. There's some stuff out there but nothing that's practical at moment. Most people I speak with seriously doubt a technology comes along, but it's always possible.
|Subject||Re: Re: CHTR|
|Entry||03/16/2015 12:43 PM|
Thanks for your thoughts, I appreciate it. In terms of deal risk, CHTR wins either way right? If the transaction goes through, CHTR gets the divested subs. If the transaction doesn't go through, CHTR gets the whole thing (could potentially be more accretive than acquiring the divested subs given that there are essentially no other bidders in the market keeping the potential price of TWC down. In addition, given how much CHTR's stock price has gone up, issuing some stock to acquire TWC is substantially less dilutive to issuing stock at $120 or $130).
|Entry||10/24/2016 08:14 PM|
olivia - this is a great discussion, I have wondered the same. What CCI is saying doesn't resonate with me on the surface (feels more like they are talking their own book) but I need to do more work to confirm. Is Jay referring to old analog coaxial cable plant? The overall cable plant has been an evolution from coaxial analog to varying degrees of hybrid fiber/coaxial as fiber is pushed deeper and deeper into the network. And of course the by 2017 the entirety of the US cable plant will be digital and no longer analog. Why isn't that hybrid fiber/coaxial network not in the best position to serve as backhaul for small cells in a 5G world? My understanding is that cable can always "push fiber deeper" into the plant by continuing to node split and take fiber ever closer to the individual home (which they are doing in stages as the market dictates).
Thanks for anyone's insights here
|Subject||DirecTVNow-Randall Stephenson charge to Cable Companies|
|Entry||10/27/2016 11:07 AM|
Curious if anyone has any thoughts on how the AT&T/TWX merger could impact Comcast or other cable companies. Randall Stephenson called out cable companies in a Company memo released yesterday:
To Cable: Watch out. We aim for nothing less than competing with you head-to-head throughout the country on cost, quality, and choice. Our acquisition of DIRECTV is already helping us deploy fiber to 12.5 million U.S. homes. Now, if we can ignite the next revolution in mobile video, it will give the entire wireless industry confidence to deploy ultra-fast 5G technology more aggressively, bringing “new pipes” and new choices into consumers’ homes across the country.
Do Comcast bulls believe that this a credible threat? Is the negative move in Comcast stock over the last few days a reflection that Comcast the market expects Comcast to do a large acqusition.
|Subject||Re: DirecTVNow-Randall Stephenson charge to Cable Companies|
|Entry||10/27/2016 07:35 PM|
This article from today's NY Times summarizes my thoughts on this. I think people do not fully understand what 5G is - it isn't a revolution, it's an evolution and looks very similar to wifi. High frequency radios (3GHz-30GHz) that propogate very short distances and do not travel through objects very well that are connected to a high speed fixed line backhaul (preferably fiber, but cable plant is the only alternative that works). Broad deployment of 5G will require massive densification and the only way that makes sense is to use cable plant. AT&T and Verizon talk about fixed wireless but the math just doesn't work - each node needs a fiber backhaul and you need direct line of sight to the antenna (on peoples' rooftops) and the distances don't really work past 300 feet, maybe 500 (VZ and T will quote 1,500 feet but our channel checks have indicated otherwise). This is why cable is getting into wireless - right now 2/3 of wireless data on your smartphone already moves through a cable network. As Tom Rutledge has said, "we're already in the wireless business, we're just not being paid for it." The reason cable is so well positioned is that it is the monopoly provider of the high speed fixed line data pipe into residential homes. As wireless and wireline converges, cable is better positioned than wireless and T/VZ fear it. Ultimately I think VZ will buy CHTR or CMCSA - it would be very logical.
Article from the NY Times:
AT&T’s Vision of Ultrafast Wireless Technology May Be a Mirage
· SIMON DAWSON / BLOOMBERG
By BRIAN X. CHEN and MARK SCOTT
OCTOBER 26, 2016
Randall L. Stephenson, AT&T’s chief executive, has a vision for the future if regulators approve his company’s blockbuster $85.4 billion bid for Time Warner.
It goes like this: In a few years, your cellphone’s data connection will be so fast that you can download a television show in the blink of an eye and a movie in less than five seconds. (That compares with up to eight minutes now for a movie.) When that happens, Mr. Stephenson has suggested, you may as well just watch TV with your cellular connection and cancel your cable subscription.
Mr. Stephenson has indicated this ultrafast next-generation wireless technology, known as fifth-generation technology or 5G, would compete with traditional TV services. “I will be sorely disappointed if we are not going head-to-head” with cable providers by 2021, he said in a recent interview.
Yet the vision Mr. Stephenson describes as a pillar of the Time Warner deal may be a mirage.
That is because 5G is unlikely to be deployed in any meaningful capacity in the next decade. The technology, which is supposed to offer connectivity at least 100 times faster than what is now available, is at the center of a bitter fight between carriers and telecom equipment makers about how it should work. No resolution is expected until at least 2020, said Bengt Nordstrom, co-founder of Northstream, a telecommunications consulting firm. “Anything before that will just be window dressing,” he said.
Even after companies and telecommunications groups define 5G and how it should operate, they face the high cost of installing a wireless network capable of handling the fast wireless speeds.
“They take a tremendous amount of money to build,” Craig Moffett, a telecommunications analyst, said of 5G networks. “The obvious question for AT&T is, where is the money going to come from to build out 5G networks on a large scale?”
The progress on 5G — or lack thereof — offers a reality check to Mr. Stephenson’s pronouncements about how a behemoth AT&T merger with Time Warner would work. Executives have promoted the deal as bringing many other benefits, like data sharing between the companies, but the ultrafast mobile video service stands out as one of the underpinnings of the acquisition.
Tom Keathley, AT&T’s senior vice president of wireless network architecture and design, said the company’s goal was to build a nationwide network that “enables our customers to view video where and on whatever device they choose,” and that 5G would rely on a combination of types of connections.
For phone carriers, 5G represents the holy grail of mobile communications. Using the fast wireless speeds, digital services like autonomous cars and delivery drones could tap into almost instant mobile networks. And almost all of the devices needed for everyday life — from refrigerators to industrial machinery — may be connected through the technology.
For now, 5G is being tested at universities and by carriers over limited areas. AT&T and Ericsson recently demonstrated the network technology working in Austin, while Verizon has done 5G tests in New Jersey, Massachusetts and Texas. Other carriers, particularly in South Korea and Japan, are also conducting trials of the new technology, and governments plan to use events like the 2018 World Cup in Russia to demonstrate their own 5G pilots.
“It’s the million-dollar question: What will 5G look like?” said Ulf Ewaldsson, chief strategy and technology officer for Ericsson, the telecommunications equipment maker.
5G has some inherent limitations. For large carriers like AT&T and Verizon, it may be economically feasible to deploy 5G only in the densest cities like New York and San Francisco.
Robert Heath, a professor at the University of Texas who wrote a book about 5G, said that millimeter wave, a variant of 5G that carriers are testing, can transfer large chunks of data very fast. But the big chunks of data have a very short wavelength, and the technology can only cover short distances. The technology does not penetrate buildings very well, he said.
“It’s not as useful as a technology for covering really large areas,” he said. “It’s a perfectly fine technology for hundreds of meters.”
5G would also be difficult to spread because what is known as the millimeter wave technology transmits data at shorter distances. That means AT&T would need to install a larger number of networks throughout the country to cover it in 5G. Dave Burstein, the editor of DSL Prime, a telecommunications newsletter, estimates AT&T would need around a million 5G networks nationwide, up from 70,000 cell sites it now operates.
“It’s impossible to have a widespread network that quickly,” Mr. Burstein said about AT&T’s prediction of 5G competing with cable operators by 2021.
Questions remain about what should be in 5G’s technical standards so that companies’ worldwide networks can talk to one another. That has involved tense late-night negotiations among telecommunications companies worldwide over what type of radio waves 5G technology should use, among other complicated global agreements. These talks may delay the significant deployment of 5G networks until well into the next decade.
John Donovan, AT&T’s chief strategy officer, said in an interview this year that the company was not concerned about rivals’ efforts to develop 5G and that he was positive about the technology’s potential.
“There are a lot of factors that are now pushing the technology,” he said.
But Mr. Moffett wondered how buying Time Warner would help AT&T achieve its 5G ambitions. The load of debt that AT&T will take on by acquiring Time Warner could hinder investment in the network technology, he said.
“If you’re trying to curry favor in Washington and get a deal sold, the one thing you can dangle in front of regulators is competition,” he said. “But the obvious weak point in the argument is it’s not clear how owning Time Warner helps AT&T deploy more 5G.”