CMCSA Preview: Reason to Believe?

Comcast (CMCSA - commentary - Cramer's Take) shares have acted very well this year, rising 14% and recouping all of the losses from the devastating second guidance reduction in early December. Most of the gains came following the company's fourth-quarter 2007 report in early February, when management reset expectations, initiated a divided and made other pro-shareholder corporate governance moves.

Ahead of the company's earnings report before the open on Thursday, the shares are moving to a new recovery high. I think investors are excepting a good report after Time Warner Cable (TWC - commentary - Cramer's Take) produced good results, especially on the subscriber growth metrics. In particular, Time Warner Cable showed surprising growth in basic subscribers. If Comcast can show similar subscriber growth and hit its financial numbers, the shares have further upside to the $24 to $25 level in the months ahead.

For first-quarter 2008, Comcast is expected to report EPS of 19 cents, revenue of $8.61 billion and EBITDA of $3.09 billion. At the cable-only level, revenue and EBITDA are expected to grow 9%. Analysts expect Comcast to lose 50,000 to 120,000 basic subscribers. (This shows why Time Warner Cable's results were surprising.) Digital TV subs are expected to grow by about 500,000, high-speed data net adds are expected at 330,000, and VoIP telephony adds are expected at 600,000.

Time Warner Cable had a slight margin contraction due to higher marketing spend, which clearly boosted subscriber results. Margins at Comcast are expected to be stable.

Comcast will be heavily scrutinized at the capital spending and free cash flow level. Capital spending should range from $1.5 billion to $1.6 billion. I have only found one estimate for free cash flow that is $460 million.

Besides the numbers, the stock price will react to how the year is shaping up relative to guidance. Key to Comcast's share price recovery is a feeling that, after a year of estimates cuts, guidance is now at the right level. The bottom line is that Comcast is cheap if it can produce high-single-digit revenue and EBITDA growth and keep capital spending at the higher-than-expected levels incurred in 2007. On 2007, Comcast's performance and management gave little reason to believe. That is no longer the case.

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At the time of publication, Birenberg had no positions in the stocks mentioned, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.