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Comcast Transforming Itself With Two Distinct Businesses

With the joint venture (with GE) and eventual takeover of NBCU, Comcast (CMCSA) is transforming itself into a company with two distinct businesses.

Number one is the cable services business that includes 51 million homes passed with ~ 24 million video customers, ~16 million internet customers and ~7.5 million voice customers. This part can be thought of as a stable, utility-like business that has developed a moat around itself with its size and scale. The cable business has three moving parts - video, internet and voice service. Despite strong competition in the video business from the DBS operators such as DirecTV (DTV) and Dish (DISH), Comcast has been growing its over-all subscribers (or revenue generating units - RGUs) and importantly, it has been growing its cable business revenue and operating cash flow in mid-single digits.


Number two is the content business. With Comcast's legacy cable channels such as E!, Golf, Versus and NBCU contributed cable channels such as CNBC, MSNBC, USA, Syfy, this business also has sufficient scale and brand awareness. For example, USA holds the #1 spot in prime-time rating, CNBC is the premier business channel. Also, NBCU broadcast assets include channel NBC which reaches 100% of US households. These channels have strong brand recognition and viewership which bring with it strong affiliate fees and advertising revenues. As a side note, both affiliate fees and advertising revenues have shown strong growth of 12% and 7% respectively in the last 5 years. Part two also includes the Universal film studio/library and Universal theme parks. In terms of operating cash flow, part two is about 80% cable channels, 10% broadcast channels with the film studio and theme parks making up the remainder. This business is expected to have a current annual run rate of about 18 billion in revenue, 3-3.4 billion in operating cash flow and 1.4 billion in free cash flow.


So, the new Comcast is an over-all solid franchise that is also a value story. As market valuation converges to fair value, the value of the company should continue to grow with time. With the company's franchise power growing with time and management now focused on shareholder returns, shareholders should be compensated for their patience with solid rewards.
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