NBC Off To A Good Start, What Does That Mean For Comcast?

After three weeks of the opening of its 2012-13 broadcasting season, NBC is up 15% in ratings compared to the same period last year while the other broadcasting networks are down by 12% to 24%. ^[1] While this is good for NBC on a stand-alone basis, how does it fit in the context of Comcast’s (NASDAQ:CMCSA) overall value? Given that NBCUniversal contributes just 15% to Comcast’s value, and within that, broadcasting business accounts for only 20% of the profits, the upside potential is very limited.

This is a surprising but pleasant development for NBC which has been re-working its programming to revive the network. NBC Broadcasting Network was a weak spot in the media arsenal of NBCUniversal when Comcast acquired it last year. Due to relatively weaker programming, the network was consistently falling behind its competitors such as CBS (NYSE:CBS), Fox and ABC. However, in the new season, NBC has started off with a significant gain in ratings and is currently holding the top spot among the big four broadcasting networks in the U.S.

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According to Comcast’s Q2 2012 results while cable networks’ EBITDA margins stood at around 35%, the broadcasting business had margins of less than 13%. ^[2] Additionally, revenues from cable networks were roughly 50% more than broadcasting revenues. ^[2] Overall, broadcasting contributed just 20% to NBCUniversal’s total EBITDA. Therefore, the sensitivity of the broadcasting business to Comcast’s value is low.

NBCUniversal’s broadcasting revenues stood at close to $6 billion in 2011, and we forecast this figure to increase to almost $9 billion by the end of our forecast period. Even if we were to assume that these revenues will double to $12 billion during the same time frame, the upside to our price estimate will be minimal (close to 2%).

NBC racing ahead is big news if we look at the broadcasting network alone. However, we must not lose sight of the big picture and, that is, the benefit to Comcast is likely to remain very small. The key drivers for Comcast’s stock are still its broadband and pay-TV businesses.

Our price estimate for Comcast stands at $37, implying a premium of about 5% to the market price.

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1. NBC Has Best Fall Season Start in 10 Years, PR Newswire, Oct 16 2012 [↩]
2. Comcast’s Q2 2012 SEC Filings [↩] [↩]