EUR 850.00 For Business Accounts Only

Morningstar | Comcast Posts Strong Cable Results, While Sky Disappoints; Shares Now Fairly Valued

Comcast’s cable segment isn’t bulletproof, but the business keeps posting fantastic numbers, with customer growth continuing to accelerate during the first quarter. NBCUniversal also performed well in the quarter, with only the recently acquired Sky business lagging. We don’t expect to materially alter our $45 fair value estimate, and our wide moat rating is unchanged. With the stock appreciating sharply in 2019, including a solid jump in response to first-quarter earnings, we now view Comcast shares as fairly valued.

The cable segment added 300,000 customers during the first quarter, up from 281,000 net additions a year ago and the best first-quarter result since Comcast began disclosing this figure in 2013. Comcast’s strong competitive position across most of its footprint continues to enable the firm to steadily take market share despite the pressures on the traditional television business. Even with fewer customers taking its television service (120,000 net subscriber losses, up from 96,000 losses last year) and television pricing remaining under pressure, Comcast has been able to increase prices on its Internet access offering enough to hold revenue per customer generally stable. Reported revenue per average residential Internet access customer increased nearly 5% to more than $60 per month. If anything, we think Comcast could be a bit more aggressive on pricing to drive penetration and further cement its competitive position in more places.

Revenue at Sky increased only 1.9%, excluding the impact of currency movements, down from the 4.5% growth reported in 2018. The firm attributed this weakness to fewer pay-per-view events and a shift to lower-priced offerings, an explanation that makes sense given the unit has accelerated customer growth over the past year. Profitability was also weak, with EBITDA declining 11% year over year on higher sports costs. While disappointing, Comcast’s integration of Sky still has a long way to go.

While Sky’s margins were disappointing, the same can’t be said for the core cable business. Comcast is now including the wireless business in this segment, causing it to restate historical results. With nearly $200 million of wireless losses now included, the cable segment’s first-quarter 2018 margin drops to 38.1% from 40.1% as originally reported. Wireless losses have diminished as the business has gained scale, totaling $103 million this year. With revenue steadily shifting to the higher-margin Internet access and commercial services businesses and strong cost controls, the segment reported a 40.1% EBITDA margin, up 2 percentage points from a year ago. From another angle, profitability in the core operations has improved to fully absorb the wireless losses. Management also increased its guidance for cable margin expansion in 2019 to 1 percentage point from half a percentage point.

NBCU revenue declined 12.5% during the quarter, reflecting a tough comparison versus a year ago, which included revenue from both the Winter Olympics and Super Bowl broadcasts. Adjusting for these two events, revenue would have grown nearly 5% on strong contributions from the broadcast network and movie studio. Advertising revenue growth remains lackluster at around 2%-3% for both the cable and broadcast networks, though management continues to point to strong unit pricing, with expectations for a strong upfront market in a few weeks. Subscription revenue growth remains solid, though, especially in the broadcast segment, where retransmission revenue increased 20%. The theme park business was a weak spot, posting a 0.4% revenue decline, which management ascribed to holiday timing. NBCU still plans to launch its direct-to-consumer streaming offering in 2020, but the firm provided little information on its plans.

On a consolidated basis, Comcast generated $4.4 billion of free cash flow during the quarter, up from $3.0 billion a year ago. The firm used excess cash to reduce leverage, with net debt declining $2.3 billion during the quarter to $106.6 billion. Net leverage, pro forma for the Sky acquisition, now stands at 3.2 times EBITDA, down from 3.3 times at the end of 2018.