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Comcast: Long-Term Prospects Bright, Rising Costs a Concern

On May 13, we issued an updated research report on leading U.S. cable MSO (multi-service operator) Comcast Corporation CMCSA.

Comcast reported strong financial results in the first quarter of 2016 wherein both the top and the bottom line surpassed the Zacks Consensus Estimate. Importantly, the company witnessed impressive subscriber gain for video, high-speed data and voice.

Having acquired the entire stake in NBC Universal from General Electric Co., Comcast is leaving no stone unturned to revamp Universal Pictures amid intense competition. Meanwhile, recently, NBC Universal reached an agreement to buy leading animation picture developer DreamWorks Animation SKG Inc. DWA in a cash deal valued $3.8 billion, expected to close by year-end.

Amid intensifying competitive pressure from The Walt Disney Company DIS, we believe this move to acquire DreamWorks Animation is a strategic one to stave off competitive threat and also should bring in considerable cost savings and revenue growth opportunities.

Also, Comcast is investing heavily in its theme park business for growth. Evidently, over the last three to four years, the theme park business has reaped considerable results for Comcast. In the first quarter, Theme Parks revenues for the company totaled $1,026 million, up a whopping 57.5% year over year.

Notably, Business Services has been witnessing strong momentum and continues to represent an attractive growth opportunity for the company. After tasting considerable success at the small and medium-sized business (SMB) segment, Comcast now aims to expand its business services division to cater to large enterprises. We believe the company’s various initiatives in the large businesses space will help it gain further traction in the business services segment apart from boosting revenues.

Also, Comcast has started deploying fiber-based 2 gigabits per second (2 Gbps) residential broadband Internet services in certain regions. Known as Gigabit Pro, this new service runs on fiber-to-the-home (FTTH) technology. Meanwhile, Comcast is currently planning the launch of its DOCSIS 3.1 compliant Gigabit Internet service later this year. We believe Comcast’s DOCSIS 3.1 and Gigabit Pro rollout is slated to fuel growth for the company.

However, growing competitive threat coupled with the ongoing consolidation trend among telecom and cable TV operators may generate significant financial fluctuations for the company.

Another major concern for Comcast is its escalating programming expenses. Notably, management expects programming expenses to increase roughly 10% in 2016 mainly due to several contract renewals coupled with increases in retransmit and consent fees and sports programming costs.

Also, Comcast has a substantially leveraged balance sheet. At the end of the first quarter, the company had $55,634 million of outstanding debt compared with $52,621 million at the end of 2015. Such high debt levels may impede sufficient cash flow generation, which is needed to meet future debt obligations. Moreover, the company’s decision to repurchase shares, raise dividends and renew its 12-year contract with IOC will dent the cash balance of the company considerably. In the reported quarter, free cash flow was $2,805 million compared with $3,183 million in the prior-year quarter.

Comcast currently has a Zacks Rank #3 (Hold). A better-ranked stock in the sector includes Cablevision Systems Corporation CVC, sporting a Zacks Rank #1 (Strong Buy).

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DISNEY WALT (DIS): Free Stock Analysis Report
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