This action might not be possible to undo. Are you sure you want to continue?
A Fundamental Investor’s Analysis of The Past, Present & Future:
Introduction/Background Comcast Corporation, originally American Cable Systems, was founded in Tupelo, Mississippi in 1963. The company began as a single service cable provider and grew to become one of the leading US firms in the industry of Cable television systems (specifically the consumer sector). The company also ranks fairly high in the Today the
telecommunications, broadcasting and box office ticket sales industry.
company serves over 47 million customers including video, high-speed internet and Comcast digital voice customers. The company now provides a wide rage of product and consumer services including Comcast Business Class, Programming Group, and Comcast Spectator. However, their main focus has consistently centered on delivering high
quality programming content and the development, organization and running of multiple cable networks. During the first 10 years or so, American Cable Systems grew at a relatively modest pace. Eventually, the company changed the name to Comcast Corporation in 1969 and incorporated in Pennsylvania. By 1972 the company was ready to go public and made its first public offering on the NASDAQ Stock Market. From there, the company began to follow an aggressive investment strategy that not only expanded its current business but enabled it to enter into numerous new business lines. The first major investment was in 1986, when the company doubled its size with the acquisition of 26% of Group W Cable. After that, the company went on acquire and invest in companies such as: QVC, American Cellular Network Corporation (AMCELL), The Golf Channel, Greater Philadelphia Cablevision, Home Team Sports (now merged with Comcast Sports
Today the company is the largest cable and home internet service provider in the US. The problem with taking the easy way out. Although important. AT&T Broadband. I can decrease my risk of paying too much and avoid information overkill by limiting my focus to the major factors that affect this company and the industry in general. Even if the investor happens to make a good investment. and expensive if seeking outside assistance (specializing in that industry). and more recently PBS. Some investors try to take the easy way out by trusting that the market has done the work for them (passive).W. Unfortunately. Luckily. 1 and 2 listed in the Reference section that is included at the end of this report). trying to look over too many pieces of information can make your analysis extremely time consuming. As a fundamental investor. (the information presented in this section is from Ref. a mere historical summary is far to abstract.Net). is the risk of paying too much for growth that doesn’t add value. I summarized these points in a S. I was able to fill in some of the gaps . Behind The Numbers—Reviewing The Financial Statements The financial statements tell a story about value. the results cannot be duplicated without knowing why or how the company got there. the story of how the business added or removed value. complicated. a joint venture with GE. if not outdated. At the same time.O. to make a strong connection to the current market statistics. while others guess widely based off of a gut feeling they have about a company (intuitive). and how it has changed over a period of time. Understanding The Business A typical mistake of the novel investor is that he/she doesn’t take the time to gain a true understanding of the business. the statements do not tell the whole story. and the E networks.T analysis (see Table 1 in the Appendix).
The information I analyzed from the trend. Included in that template were a number of other financial analysis tools that I found to be extremely helpful. common size. The current financial statements represent the middle of the story. they only tell where the company is now. told me how the company had performed in the past and what direction this company was heading. or estimates. The problem is that we have no way of knowing with exact precision what the future will bring. growth potential. some of which is directly related to the company (earnings. Part of that value is revealed in the current financial statements. The solutions: form our own opinion. The current stock market price is determined by the supply and demand that exists within the market. As mentioned earlier. about the future outcome. and those with a continuing interest (current shareholders/debtholders). To extract that value. For managers. That price is a reflection of the current market’s opinion of the company. I began my analysis by making a simple time series using the company’s annual report for the prior four years (including management’s notes) and the FASB Template.for Comcast’s story by using my understanding of the business discussed above. their primary concern is what the future financial performance and market position will be. Present financial conditions affect only the investors and shareholders who were already invested in Comcast at the time.). That opinion is based on a wide range of public and even private information. and ratio analysis. or follow the opinion of one of the other market participants. the problem with price is that it does not always represent value. etc. if not the market. while others relate to the systematic risk that is outside of the company’s control. I continued on to step two in the process of fundamental analysis: analyzing the information. new investors. Once I understand the company’s internal .
I followed a similar procedure while looked over the ratios. line item percentages. I examined each statement very carefully. I entered the financial data from the firm’s financial statements. As a final check I ran through a residual valuation analysis. I added recommendations for improving Comcast’s financial operations. Volatility makes it extremely difficult to make a true assessment of the firm’s current and possible future position. Using a number of financial ratios & statistics. I quickly realized that year to year activity during that period was extremely volatile.condition. To test the accuracy of this benchmark I reviewed the opinions within the company. Evaluation Of Comcast’s Four Basic Financial Statements---Complications During The Early Stages Of Analysis Using the FSAP Template. I needed to know how Comcast rated when compared to the rest of the industry. and the market in general. noting information I found to be particularly useful or detrimental to my evaluation. Using all of this information. In concluding my analysis. noting general patterns and major year to year changes within each statement and as a whole on the Data tab. This volatility was directly related to the volatility in the US economy. I have summarized each step below. which comprises approximately 95% of the business. I was finally ready to evaluate Comcast in terms of its current market price. such as the P/E ratio. Once entered. I rated Comcast position against each competitor (select individuals and the industry). to determine the appropriate investment strategy. After comparing notes. and growth rates on the Analysis tab. as reported in the Annual 10k report from 2004 to 2009 (2004 was included in order to have a complete review for 2005). other analysts. This inconsistency in Comcast’s financial statements decreases the validity and .
In order to correct for this decrease. five of the line items were particularly concerning. those line items were: cash & cash equivalents.reliability of the financial trend analysis and any averages that were calculated for benchmarking purposes. While uncovering how the company has historically positioned itself over the years. summarizes the financial condition of the business at one specific point in time. The balance sheet. Once my research was complete.” The explanations to each of these questions are outlined below as follows: 1. marketable securities. and retained earnings. The majority of my research utilized the management discussion and analysis section. or “snapshot. Before going any further.” (as it is often referred to in the financial community). The next four sections summarize and highlight some of the more critical items that were uncovered in reading over the financial statements. I had to resolve the questions that each of these line items (and the overall BS) “suggested. making it notably unique from the other financial statements. Evaluation Of Comcast’s Four Basic Financial Statements—The Balance Sheet Reviewing a firm’s balance sheet is critical to the valuation process. PP&E. which were all included in each year’s Annual 10K report. I identified each material year to year variance and researched the cause of said variance. intangibles—specifically franchise rights.) Why has there been an overall decline in the company’s most liquid assets? Is this decline an indicator of increasing investment risk (liquidity and going concern issues)? . the additional notes and supplementary information sections filed with the consolidated financial statements. I continued on with my analysis.
So far. explained below. As with PP&E. In addition. However. no impairments have been made.-The market value of the firm’s securities has decreased primarily because of the financial conditions within the market. and losses suffered on unusual items (nonrecurring derivative transactions). -New customer growth rate for cable services has decline due to fewer customer segments to market to (market saturation) and the downturn in the housing market (as foreclosures increased. future impairments could be possible if these rights were later limited due to changes in regulatory and market conditions. have gone down. the current customer base decreased). Other operating investments were not significant.) Why has the growth rate in PP&E declined over the last few years? -Capital expenditures for cable services. future investments in these assets will likely decline as a result of the aggressive expansion efforts taken years prior.) What are the “intangible franchise rights” and how does the company account for these items? -Intangible franchise fees are the rights the firm purchases in order to operate and offer services to customers in that geographical area. -Currently. -Liquidity and going concern risk does not pose a significant risk at this time. Free cash flow generated by operations continues to be strong. The firm annually tests these assets for impairment by using a discounted cash flow analysis. historically a very sizeable portion of all investments. . 5. 4. these assets have an indefinite useful life—thus no amortization expense recorded. the company has a sizeable credit line with its vendors to tap into for short-term liquidity needs.
Evaluation Of Comcast’s Four Basic Financial Statements—The Income Statement The income statement is essentially an outline of the firm’s financial performance over a fixed period of time. and future dividend payments. -Additionally. -Increases were partially due to a number of new accounting and reporting requirements and increased regulation requirements for the industry. The statement reveals the capabilities of the firm in generating sales from current product/ . over two future redemption periods using either cash or stock. broken out into operating and non-operating sections.2 billion (expected to be paid at the end of 2010). will require a cash payment of roughly $7. -Part of the reason for maintaining the stock repurchase plan is for the NBC Universal transaction agreement the company has with GE. -The GE transaction. lenders and creditors require that the company maintain certain financial ratio and appropriate a percentage of retained earnings for debt obligations.) Why are retained earnings growing at an increasing rate--Does the company have plans to use those funds for future investment.6.3 billion approved is spent or the plan’s expiration at the end of 2012. or are they contractually obligated to retain earnings under a debt agreement? -A portion of retained earnings are appropriated for: stock repurchases. Beyond the initial cash payment. This will give Comcast a 51% controlling interest in the newly formed company. the company will have the option to purchase the remaining interest from GE. once closed. The stock repurchase plan is expected to continue until the remaining $3. pensions obligations.
additional customer cable sales have gone down due to the market getting closer to market saturation. created large variances in P&L line item accounts. the income statements provide only a weak assessment of the present and future potential. eliminate individual expenses or discontinue entire business lines that do not add value. making it difficult to accurately evaluate performance year over year. create new product lines that have higher profit margins. . -The company has historically relied on its free cash flow from operating revenues to pay its debt obligations. due to a number of limitations. -Based on the balance sheet analysis. after subtracting out all of the expense incurred over that same period to generate those revenues. outside investments have also declined. Net income represents the profit or residual claim that remains to common shareholders (minus any preferred/minority interest).services lines (plus additional non-operating items). Unfortunately. and converting those sales into net income. A firm can increase profitability by doing one or all of the following: increase the sheer volume of current product lines (assuming marginal cost rates remains the same). followed by a comparison of the best and worst years of financial performance. Limitations/Concerns In Evaluating The Income Statement -The decline in the US economy. These limitations will be listed below. Over the last few years. -Sales from cable services represent a large portion of the total sales revenue generated by the company. and reduce the negative impact of the those expense that are core to operations (with efficient and effective process improvements). and a brief overview of the most recent year’s performance.
as did many US companies. It was the only year in which the company was able to drive up sales revenue. During this period. and sales and customer subscriptions growth over the prior year. the US economy saw its worst recession since the Great Depression. The increase was however limited due to increased operated expenses from supplier rate increases. the company’s stock was trading at an all time high (for year-end purposes) and investing heavily to expand its cable segment operations. there are two years that visibly stand out among the rest. Despite these decreases. stock market price.-The company has limited power in managing its two largest operating expenses: network programming fees and video programming fees. but. Comcast’s experienced a drop in comprehensive income. expected n the future. Two years later in 2008. the company had its overall best year of financial performance. . without marginally increasing every operating cost—thus converting more sales into profits. The reason net income fell below the prior year was due to investment losses and impairments which were reported as other accumulated income/loss in a separate statement following the statement of stockholder’s equity. began to see their financial Rate increases are common and performance go down. 2006 & 2008. The growth in sales relates to new customer subscriptions and pricing markups for customer related fees. Expenses related to cable programming fee rates were actually increased during this period. Comcast. total expenses were maintained by the gains on the sale of investment assets and the gain on discontinued operations. Financial Performance Milestones-Triumph vs Defeat Looking over the last five years. In 2006. the company did have increases in terms of operating profit.
even beating out 2006 figures. however. The section “Comcast vs. Net income and earnings per share for common were at record highs. Non operating income (loss) also improved--interest expense decreased due to prior and current year debt retirements and decreased in interest rates and investment income (loss) improved due to reported investment gains (realized and unrealized). The company’s stock price was down slightly. Looking at just the income statement dollar amounts. Sales revenue increased for all of Comcast’s major business sections. is not knowing how much. and explains how cash is affected by changes in the prior two statements. Operating profit also increase in both amount and as a percentage of sales— partially due to streamlining operations (layoffs). where the company used those funds. Comcast’s rate of growth actually declined below 2008 percentages. it would appear that Comcast has bounced back and is moving in the right direction— especially if comparing 2009 to 2008. investing. so their ability to generate additional earnings or value is still declining. Evaluation Of Comcast’s Four Basic Financial Statements—The Statement Of Cash Flow The statement of cash flow shows which of the firm’s activities (operating. that may have been due to the larger dividends declared and paid out during the year. but first an analysis of the two remaining statements. (if any) of that decline is due to the depressed economic conditions. so did Comcast’s financial performance. It is also very . The Competition” below helps to shed some light on this issue. or financing) generated cash.Financial Performance-2009 As the US economy began to stabilize and even improve. On the other hand. The problem in figuring out Comcast’s true position at this point.
The net cash used by the investing activities is decreasing. while the cash used by financing has been increasing since 2006. -Equity available to common would need to be reduced by the minority interest. If the returns on current business lines continue to decline without support from new investments. positive cash flow and even that was declining. These trends combined with few other liquid assets on the balance sheet and declining sales growth from the leading business segment (cable) signal major cash flow problems ahead. I needed to find out whether or not this was a normal position to have in the industry—to be addressed in the “Comcast Vs. The Competition” section. The financing and investing activities only provided little. In order to grasp the severity of the situation. Listed below are those items that would need to be reclassified for valuation purposes. Although covered last. the company will be forced to sell off less liquid assets at possibly unfavorable prices (fire sale) or default and face bankruptcy. and what my share of it would be as a common shareholder. . Evaluation Of Comcast’s Four Basic Financial Statements—The Statement Of Changes In Stockholders’ Equity The statement of changes in stockholder’s equity summarizes the net transactions that occurred over the period that affected stockholder equity.useful in valuing the firm in terms of liquidity and solvency risk—both of which seemed to be cause for concern after reviewing Comcast’s statements. -The company did not have any issued or outstanding preferred stock holders. what were the causes of those changes. this was the first statement I examined in order to find out how shareholder’s value had changed. During that same time frame. the cash provided by operations has been increasing at a declining rate. if any.
Typically an amount less then one could indicate liquidity risk. -The company uses grant date accounting for its share based compensation expense and employee stock option. low but also improving. -Solvency Measures -Altman Z Score: 1. Net Working Capital Days: -73. Ratio & Other Analysis In addition to the information noted above. Although negative it was showing yearly .8 generally means the probabilities of bankruptcy within the next one to two years is extremely high. the amount unpaid at year end would need to be added back to shareholder equity. A score below 1. -Liquidity Measures Current and Quick Ratios: . Deferred compensation for the share based compensation should be reclassified as a liability and the actual losses on the employee stock plan made be over or understated.34. -The 3. Operating Cash Flow/Liabilities: 127%.-From the dividends declared. -Hidden dirty surplus accounting items reported in the Other Accumulated Income Statement—unrealized and translation gains and losses.44 & . Values are from 2009. improvement. I evaluated Comcast using a number of financial ratios and calculations---listed below are those which I found to be most beneficial to my evaluation process.3.3 billion shares authorized to be repurchased could have an effect on future shareholder equity if purchased in efficient market conditions.
operating cash flow and leveraged cash flow ratios from the tables. many of these leaders were competing in entirely different customer markets (BSY. The company does beat its direct competitors in terms of sales and profit margins.65 and 1. Comcast vs. Comcast had the lowest current ratio and had the least . L a British Company). and so were not as reliable for benchmarking purposes. Comcast ranked relatively low against the industry leaders. but it scores the lowest in terms of EPS and quarterly revenue growth. Currently Comcast still ranks highest against other US competitors. capitalization is equal to the number of shares the firm has outstanding times its market value. Both figures have shown steady improvement. The company’s P/E. -P/E and P/B: 13. -Profitability -ROA & ROCE excluding nonrecurring items: 16. ROA and ROE ratios also rank fairly low when compared against the industry and direct competitors. The Competition For this section.-LT and Total Debt to Equity Ratios:. This information was provided by Yahoo! Finance (Ref. Both ratios have dropped since 2005.7. However.28 and 1 to 1. 3) using information available from December 2010. This means the firm has low financial leverage. more assets were financed with equity then debt. I reviewed the statistics from Tables 2-6 which are provided in the Appendix. The company did rank fairly high in terms of market Market capitalization when ranked against the top cable and television companies. This statistic is useful in determining a company’s relative size in the market. less risk of default but a higher initial borrowing cost (no tax benefit).7 & 8. To test my liquidity concerns I reviewed the current ratio.62.
I would still recommend a hold strategy. which I calculated based on the average reflected in years 2005-09. This mirrored effect was made even more evident by the volatility in Comcast’s financial performance over that the last 5 years. Had this analysis occurred at the end of 2009.86 per share.2 (Yahoo!). which means that changes in the firm’s financial performance will tend to mirror those seen in the US market. I used the percentage of revenues from 2009 for all other income statement line items except tax. I would advise lenders and creditor to be weary of increasing their lines of credit with Comcast. At the end of 2009 Comcast was trading at $16. I would recommend holding off on making any additional investments at the current market price. I would have recommended a buy strategy or a hold for those currently invested. For current investors.93 per share.60 per share.percentage of funds left over from operating cash flow after debt payments (leveraged free cash flow)—this only seemed to indicate further that Comcast was facing high liquidity risk. with no long run growth expected. The company has a beta of 1. For sales revenue. Based on my valuation. As a final check I ran through a simplified residual income valuation analysis. Due to future supplier rate increases. I assumed operating expenses would increase at an increasing rate yearly. Currently the stock market price is $20. Overall. I assumed growth would continue to show decline at an increasing rate from forward years 1-5. Comcast: Investment Opportunity or Liability Risk Upon completing my analysis. As a final piece of advice. I would recommend paying very close attention to US economic decisions. I still had some uncertainty as to a definitive investment strategy. The firm might begin running into cash . Comcast should be trading at a price of $21. At this time.
more importantly. Recommendations For Improving Comcast’s Financial Performance -Increase cash flow management. -Expand into new markets outside of the United States to add some protection against unfavorable US economic movements.flow shortages in the near future (forecast and valuation shown in the Supplemental Information section). -Cable sales growth is going to continue to decline and profit percentages are going down due to rate increases. the company must find new investment opportunities with value added return. -Increase investment in intellectual assets to create new products and service lines and. look for investments with less supplier power so that you can better manager your expense and profit margins for those operations. In order to increase operating profitability. . In addition. to stay ahead of the competition.
-Able to enjoy both economies of scale and scope. the future. Weaknesses -Suppliers are highly concentrated. -Able to generate a lot of new/improved programming innovations and get them to market quickly (high Idea/Product Turnover). . -The joint venture with GE that was finalized at the end of December 2009 can significantly increase Comcast’s revenue potential.-Reputation as one of the worst in customer satisfaction (esp. cable services industry.T. . -This would likely force the company to pass some of this increase along to the customer. Analysis Strengths -The firm is a leader in the U. and an entrepreneurial spirit within the firm. -The combined assets and skills of the two companies will give Comcast an even stronger competitive advantage in the entertainment and media industry. -Strong brand name recognition -Division integration. and rude to the point of abusive in some cases. open communication.Appendix Table 1: S. -Similarly. Opportunities Threats -The firm’s expansive operations allow -Rates charged for both video programming them to develop new product lines in and licensing fees are expected to go up in multiple categories. Relatively low switching fees and short contract periods -No significant investments in customer markets outside of the US-at risk for market fluctuations. -Numerous customer fee rate increases.W. in service)—Ranked # 1 twice in 04 & 07 by The American Customer Satisfaction Index. -Able to cross-sell multiple products within their customer base. -Frustration once representatives were reached because they were poorly trained. -Higher fees will strengthen their already poor customer satisfaction reputation and negatively impact their customer base. substitute products are limited—strong pricing and overall market power -The licensing fees charged by programming networks are singlehandedly the largest operating expense for Comcast. via higher service fees. -Very long wait times to even reach a representative. -The company serves more areas and has more customers than any other cable service provider in the US.O. unprofessional. video programming expenses related to retransmission fees also represent a large chunk of Comcast’s total operating expenses.S.
faces equally tough competition as it moves farther into the telecommunications industry. federal and even local levels—future regulations pose a serious risk to Comcast’s future operating performance.S who have regular internet access continues to increase. -The co. Comcast can create highly customized consumer offerings—with greater profit margins. Harder to gain sales—closing in on market potential. visibly better programming or faster internet speeds). the struggle to gain market share & brand recognition is going up as the fight for advertising space increases. -The industry is highly regulated at the state. Additionally.-The company will be able to service a wider ranges of their current customer needs. to a much broader area. -As access and usage increases. as does the time the average American citizen spends on the internet. -This will enable the company to offer services such as 4G high speed internet. . while opening themselves up to entirely new customer markets -The number of citizens in the U. -Services demanding customers. in a highly technologically dependent industry—one new competitor innovation could quickly wipe Comcast out of an entire costumer segment (i.e. -The company’s main industry. cable/TV/video industry is highly competitive and intensifying.
The Industry Table 3: Comcast VS Individual Competitors .Table 2: Comcast VS.
Table 4: Direct TV Financial Ratios-P/B 50.24 Table 5: Dish Network Financial Ratios-P/B NA .
31 References .Table 6: Comcast’s Financial Ratios-P/B 1.
4: http://www.yahoo. 3: http://finance.com/equity-premium/the-2010-equity-risk-premiumfrom-academia/ --estimate for market risk premium Supplemental Information .com/q/co?s=CMCSA+Competitors Ref. 2: http://en.wikipedia.Ref.org/wiki/Comcast#Financial_performance Ref.cxoadvisory.com/corporate/about/pressroom/corporateoverview/comcasttimeline/ comcasttimeline.html#1963 Ref.comcast.1: http://www.
P.F.5 R.1% .Comcast Income Statement Forecast Residual Income Valuation: My Required Rate of Return: 1. Valuation Per Share = 2009 CMP at 8.R + 6% M.R. In testing out various rates of return.