Comcast (CMCSA - commentary - Cramer's Take) reported good first-quarter 2008 results. EPS matched estimates while revenue, EBITDA and free cash flow exceeded estimates. Most subscriber metrics also beat estimates. Margins fell slightly as Comcast upped its marketing spending and began its aggressive rollout of service to small and midsized businesses.
Comcast's results closely paralleled those of Time Warner Cable (TWC - commentary - Cramer's Take). It appears that the cable industry has stabilized after a poor 2007. Both companies were able to accelerate subscriber growth with only a small sacrifice in margins. Both companies also saw stable capital spending. The mix of upper-single-digit revenue and EBITDA growth and stable capital spending means rapid growth in free cash flow. With both companies focused on returning cash to shareholders and investor expectations reset to a lower growth profile, the stocks should continue their recovery with additional upside of 10% to 15% possible in the near term, especially if second-quarter 2008 results, during the seasonally slow period, confirm the first-quarter trends.
In its cable segment (95% of financial results), Comcast reported revenue of $7.916 billion and EBITDA of $3.142 billion vs. consensus of $7.85 billion and $3.15 billion. Free cash flow grew 59%, or $400 million. Capital expenditures were flat so that virtually all of the operating cash flow growth flowed to free cash flow. This is exactly the financial profile cable investors have been hoping for. In 2007, this model fell apart as revenue and operating cash flow growth decelerated and capital spending rose. If Comcast and the rest of the cable industry can sustain this performance for several more quarters, substantial upside exists in the shares.
At the subscriber level, results were especially good. Comcast did lose basic subscribers (analog TV only). Basic subs fell 57,000, but this was at the low end of expectations, with several analysts looking for losses of 100,000 or more. Digital TV subs came in above most expectations at 494,000.
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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.
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