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Time to Buy Comcast?

Posted on Monday, Jan 7th 2008

2007 has been a terrible year for Comcast (Nasdaq: CMCSA), the stock having lost over 35% value. Is it time to buy or does it have more downside?

For one thing, Comcast is not going away. It dominates the US multi-channel television market, serving more than 21 million customers with an HFC network that passes through 40 million homes across most major cities. Comcast is a savvy cable operator, and has registered impressive growth since its acquisition of AT&T Broadband in late 2002. Though video represents 63% of its revenues, high-speed data (15%) and telephony (3%) are also expected to drive revenue growth going forward.

Comcast added 1.4 million RGUs in 3Q07. Year-to-date, it added over 4.8 million RGUs, a growth of almost 40%. However, not everything is hunky-dory at Comcast. Last time when I reviewed Comcast, the Company had turned in a solid second quarter performance with 28th consecutive quarter of double-digit OCF growth and fourth consecutive quarter of record-breaking RGU.

However, Comcast has since lowered its 2007 guidance due to “an increasingly challenging economic and competitive environment.” RGU net adds guidance was lowered from 6.5 million to 6.0 million and cable revenue and operating cash flow y/y growth from 12% and 14%, respectively, to 11% and 13%. It also said that consolidated Free Cash Flow is expected to be about 80% of 2006, compared to previous estimates of at least 90%.

As if that was not enough, it is now facing two different lawsuits filed by investors who allege that the Company has made false statements about their performance in order to affect stock value.

The Company is betting big on Triple Play (which I believe is the future) to deliver more value to consumers and higher total revenue per subscriber to the Company. It is also looking at commercial as a major growth area and plans to address 5 million small businesses in US. Comcast Interactive Media (CIM) can also play a key role in driving future revenues. We reviewed CIM’s strategy in detail earlier.

Comcast is increasing its capital spending plans to upgrade its network. It plans to spend $6 billion, up 5% from its previous target.

Strategy is all very well. However, execution is another matter. Our household has Comcast for Cable and Broadband, but not Telephony. I think, Comcast needs to take a close look at their up-sell / cross-sell marketing programs so that in cases where they have 2 out of 3, the third piece is converted over with much greater success rate. The fact that they have not converted us over to Triple Play yet tells me that their execution is poor.

Support is also poor. I have had rows with their support personnel which I took all the way up to CEO Brian Roberts. The redeeming thing was that Mr. Roberts’ office called me back immediately, and the problem was addressed.

At $17.21, freshly recovering from its 52-week low of $16.80, Comcast could be a bargain, if these low hanging fruits of marketing and customer service can be addressed. More broadly, Online Video continues to grow. Why should Comcast not be a strong beneficiary given how strategically it is positioned in the market?

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FTTx initiatives by telcos are the reason the MSO stocks are in a funk and in my opinion that is a real and serious worry.

This is the 1st time that you have two pipes to the home and in a zero sum game, cable will lose pricing advantages AND/OR lose volumes

Nik Tuesday, January 15, 2008 at 9:17 AM PT

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