Pay-TV Subscriber Turnaround Lends Upside to Comcast Stock

The past few quarters have demonstrated that Comcast (NASDAQ:CMCSA) is doing it right when it comes to bolstering its pay-TV business and growing other key businesses such as broadband. Comcast’s cable rival Time Warner Cable (NYSE:TWC) has lagged behind while satellite companies such as Dish Network (NASDAQ:DISH) and DirecTV (NASDAQ:DTV) are gaining subscribers. Comcast has still not entered the zone of positive pay-TV subscriber additions but looks as though it may be on that path. Our price estimate for Comcast stands at $33, implying a premium of about 15% to the market price. We believe that Comcast has some potential value to unlock and make a case for it below.

See our complete analysis for Comcast

Pay-TV Business Improvement

Comcast has managed to reduce its pay-TV subscriber losses by a great deal: in Q4 2011 it lost about 17,000 subscribers which was a significant improvement over Q4 2010. These losses increased slightly in Q1 2012 but were still less than Q1 2011 losses. The year-over-year improvement is clear and Comcast has been able to do this despite increasing competition (see Comcast’s Video Results Improve Mildly But Show Promise). The launch of its streaming service Xfinity Streampix will go a long way in improving Comcast’s position in the pay-TV industry. The stock has remained somewhat suppressed due to continued subscriber losses but given the improvement underway, the stock could get a lift over the intermediate term.

We estimate that pay-TV (including on-demand and HD/DVR) constitutes close to 35% to Comcast’s value and is therefore quite important. The gain in pay-TV subscribers also demonstrates a clear opportunity to market other bundled services such as broadband and digital phone. Therefore, pay-TV subscriber growth is one of the critical drivers of Comcast’s value. Currently we estimate that Comcast will be able to get back to positive subscriber additions by next year.

Expansion In Broadband & Business Services

Growth in the broadband market has been healthy for Comcast, although digital phone subscriber additions have been relatively slower. Despite registering strong broadband adds last year, Comcast continues to grow from that higher base. The company is trying to differentiate its broadband service through customer service enhancements such as Xfinity Signature (see New Support Service from Comcast Could Bolster Market Share) and offering higher speeds and perks such as the removal of data caps for subscribers accessing its Xfinity on-demand service via Microsoft’s (NASDAQ:MSFT) Xbox. The bundling of services has helped as well, along with fast growth in the business segment. We estimate that the broadband and digital phone (VoIP) businesses constitute about 45% to Comcast’s value. The growth in the broadband business is not only coming from subscriber growth, but also from ARPU (average revenue per user) improvement as more subscribers go for higher priced faster tiers.

Risk Mitigation

Comcast has also diversified its risks. Traditionally it had expanded into three separate businesses – pay-TV, broadband and VoIP, thus reducing its reliance on any single business. With the acquisition of a 51% stake in NBCUniversal, it has also expanded from being just a carrier to a content creator and owner. The crux is that Comcast has diversified its risk not just among different businesses within the service provider industry, but also across different industries (content creation and content carriage). This makes it a solid overall business, with flexibility to benefit whether the negotiating advantage shifts in the carrier’s direction or the content owner’s.

Nevertheless, certain risks exist to our price estimate. A lot depends on Comcast’s ability to continue with broadband growth and remedy its pay-TV losses. The competition in the industry is increasing and telcos are gaining share. Dish Network has revived itself as well and plans to launch wireless broadband in the future. Increased intensity in competition in the future could hamper Comcast’s ability to grow and expand.

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