Comcast’s (NASDAQ:CMCSA) profit margins (EBITDA) fell in 2011 to 41.7% after increasing in both 2009 and 2010. We believe this negative trend will continue into 2012 and going forward as the company faces margin pressure from higher programming costs and greater marketing costs to remain competitive.
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Increasing Costs Unavoidable
Q1 2012 saw Comcast’s revenues increasing 5.7% while its marketing costs grew by 11.7%. [1] Similarly, for Q2 2012, Comcast saw revenues increasing 6% while its programming and marketing costs grew by 7.9% and 9.7%, respectively. [1] Increasing programming costs cannot be avoided,and the solution lies in increasing prices to compensate for the margin pressure. Additionally, the company could leverage its higher margin broadband business as subscribers adopt higher priced tiers; however, this implies that the company will continue to spend heavily on marketing. As a result, we see margin pressure going forward, which investors should keep in mind while evaluating the company.
Comcast Still Has Value
We have assumed the margin decline in our current price estimate for Comcast, which stands at $37 and implies a premium of about 10% to the market price. The premium is due to our expectations that Comcast will be able to turn around its pay-TV subscriber losses in the next few years and continue growing broadband ARPU and subscribers. Even though the margins may decline, the absolute amount of cash profits will continue to increase due to sharp growth in broadband revenues. Comcast is also expanding its broadband, digital TV and cable TV services to business and has seen high growth in this area.
Additionally, the joint marketing deal with Verizon is likely to help Comcast expand its services in the U.S. The slowdown in expansion of telecoms’ fiber optic-based services will also aid Comcast in restrengthening its pay-TV subscriber base and expanding its broadband service.
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