Comcast Rises Amid DreamWorks Deal Chatter, Strong Earnings

Comcast (CMCSA) was rising on Wednesday as the country's largest cable-TV operator posted first-quarter results that showed growth at both of its core businesses: cable-TV and high-speed Internet service.

The Philadelphia-based telecom and media company posted earnings of 84 cents a share, beating the average forecast of 79 cents from 25 analysts surveyed by Bloomberg, and above the 81 cents a share from the same period a year ago. Revenue for the first-quarter rose 5.3% to $18.79 billion, beating analysts' estimates of $18.6 billion.

Shares were gaining 1.9% to $61.86 on a stock, extending its 2016 advance to 9.9%, ahead of the benchmark S&P 500  index, which has added 2.3% in 2015.

As shares rose, Comcast was the focus of a report that the owner of Universal Pictures is in talks to pay more than $3 billion to acquire DreamWorks Animation (DWA) , the movie studio house headed by Hollywood heavyweight Jeffrey Katzenberg. The Wall Street Journal reported talks are ongoing, citing "people familiar with the matter."

DreamWorks share jumped 14% to $31.

For Comcast, the quarter's results served to show that the company continues to win market share from telephone providers AT&T (T) and Verizon (VZ) , both of which continue to struggle to retain both Internet and video customers. 

Comcast added 53,000 cable-TV subscribers, its best first-quarter addition in nine years, demonstrating that despite millennials affection for on-demand Internet-based platforms such as Netflix (NFLX) and Time Warner's (TWX) HBO NOW, cable-TV remains a robust business. The Philadelphia-based telecom also added 438,000 Internet subscribers, its best first quarter in four years.

AT&T, meanwhile, reported this week that during the first quarter it gained fewer new U.S. wireless subscribers with conventional plans than analysts had expected. Shares slipped.

"Comcast has been performing exceptionally well compared to their phone rivals, taking very substantial market share," Michael Hodel, media analyst at Morningstar, said in a phone interview from Chicago. "Comcast's real strength is its ability to deliver Internet access in a very consistent, high-quality way."

A deal for DreamWorks would allow Comcast to integrate the Shrek and Kung Fu Panda franchises with its own animation group, Illumination Entertainment, creator of the Despicable Me movies. DreamWorks, which Katzenberg has spent the past 18 months reorganizing, had gained 4.3% this year before today.

Strength in Comcast's cable-TV and Internet businesses drove a 5.1% increase in operating income for the quarter to $4.09 billion. Sales in its business services division, which sells phone, Web and video services to companies, jumped 17.5% to $1.31 billion.

The only blemishes to the quarter for Comcast were in broadcast TV at its NBC network and at Universal Pictures, which a year ago was bolstered by the success of Fifty Shades of Gray. NBC is likely to get a jolt in viewership when the Olympics from Brazil airs in August and the presidential campaign heats up in the fall.

Much of Comcast's success at adding video subscribers stems from the wide adoption of its X1 set-top box, which has received positive reviews for providing consumers with better means of navigating the often cumbersome 200-channel cable-TV bundle.

"The X1 platform has really helped them to retain customers or even minimize losses," David Heger, a media analyst at Edward Jones, said in a phone interview from St. Louis. "For the cable guys if they can keep the subscriber declines minimized, investors feel they're doing very well."

Heger has a buy rating on Comcast.

NBCUniversal posted sales of $6.9 billion, a 3.9% increase as advertising revenue at its cable networks jumped 12% to $559 million. Theme parks revenue jumped 58% to $375 million, largely due to the inclusion of Universal Studios Japan. Comcast's theme parks business continues to add value to the company, a year after the division was bolstered by new Harry Potter attractions.

"The theme parks is where there's been continual surprise," Heger said. "They get great return as they open these new attractions -- it's pretty amazing with theme parks that people keep flocking in."

Comcast, Heger added, arguably remains an attractive stock even as it trades at 18.8 times earnings, not far off its five-year high of 22.5 times earnings. Yet with the S&P 500  trading at 19.2 times earnings, its highest level since March 2010, Comcast shares don't look so pricey, he said. The stock has been on a steady upward trajectory for more than five years, gaining 141% since April 2011.

Compared to its peers, Comcast is "attractively valued," said Morningstar media analyst Michael Hodel, largely because the "transaction excitement" around Charter Communications (CHTR) and Time Warner Cable (TWC) as well as Cablevision (CVC) has boosted valuations "beyond what's reasonable."

Morningstar has a neutral rating on Comcast.

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