Can Comcast’s Growing Broadband Numbers Insulate The Company From Cord Cutters?

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Comcast (NASDAQ: CMCSA) reported higher-than-expected second quarter profits despite missing revenue estimates in the quarter. The company’s consolidated revenues grew 2% year-over-year (y-o-y) to $21.7 billion and its adjusted EBITDA grew 5% y-o-y, reflecting solid growth at Cable Communication and NBCUniversal. The company benefited from continuing gains in broadband revenues, which offset declines in video revenues as residential subscribers continued cutting cords. On the other hand, NBCUniversal saw strong results in television (broadcast and cable) amid higher distribution, advertising, and licensing revenues. However, Universal Pictures remained a drag in this quarter against tough prior-year comparison and film slate timing issues. In addition, cost cuts helped the company post adjusted EPS growth of 25% y-o-y to $0.65. Going forward, we expect the company to benefit from this positive momentum and post improved growth in sales and earnings in Q3 – driven by its streaming products and X1 services, cost-saving measures, and lower effective tax rate.

Comcast’s stock is down over 10% year-to-date, due to weakness in its pay-TV business as a result of cord cutting. Our $40 price estimate for Comcast’s stock is around 10% ahead of the current market price. We have created an Interactive Dashboard for Comcast which outlines our forecasts for the company’s Q3 and full-year fiscal 2018 results. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

Below we outline certain key trends that we expect for the company in fiscal 2018 going forward. 

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Expected Trends In Q3

We forecast Comcast to report a minor loss in cable TV subscribers due to expected competition and cord cutting measures in Q3. While cord cutting is likely to weigh on its revenues, the popularity of Xfinity Double and Triple Play bundling should continue to largely offset these declines. Accordingly, we expect the subscriber losses to have a fairly limited impact on the company’s top line going forward. In addition, Comcast is also aggressively pursuing over-the-top (OTT) streaming services, with the launch of Xfinity Stream and the recently rolled out Xfinity Instant TV across markets that the company already serves. Although the company currently does not provide the breakdown for its OTT service, we believe that the streaming service will be instrumental in retaining and attracting consumers for Comcast’s cable offerings.

NBCUniversal’s cable network and broadcasting revenues are likely to improve as the increases in contractual rates could increase revenues in Q3. Theme park revenues have grown in the second quarter due to increases in guest spending and higher guest attendance. We expect these trends to continue in Q3 and boost revenues during the quarter. Comcast has been increasing its investments in this business as it plans to open new attractions each year in the U.S. to boost its share in the growing market. Additionally, it has planned a $3.3 billion investment to build a theme park in Beijing by 2020.

FY 2018 Outlook

In 2018, we expect the company to benefit from its streaming and broadband services in 2018, and we expect the company to grow at a similar pace as that of 2017 going forward. We expect Comcast to generate around $87 billion in revenues in 2018, and earnings of over $12 billion. Of the total expected revenues in 2018, we estimate $54 billion in the Cable TV business and nearly $34 billion in the NBC Universal business.

Comcast’s Cable TV business provides video, high-speed internet, voice, and security and automation services to residential customers under the Xfinity brand. We have estimated 22.3 million video subscribers in the U.S. with an average monthly fee of $86, translating into $23 billion in video revenues in fiscal 2018. Comcast’s video subscribers and voice subscribers have been declining modestly over the last two years due to stiff competition in the live streaming media and telecom alternatives, respectively. We expect this trend to continue in the near term as well. However, we expect Comcast’s high-speed internet customers to grow going forward, as the company could benefit from initiatives such as Xfinity Mobile, a wireless service through 16 million WiFi hot-spots.

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