CMCSA

Investing Strategies Falling Knives
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Comcast has gotten clobbered over the past couple of days, owing to its weak subscriber growth this past Q coupled (probably) with an awful report from Roku (yet another weak advert sales story). Comcast is basically a utility, although there is some growth opportunity in its ownership of NBCU and its various properties (e.g., theme parks and Sky). The company throws off tons of cash and pours it into a nice dividend (2.5%) and share buybacks (not always at good prices). Now trading at around 11x this year’s EPS.

I bot some this morning and could add more if this continues.

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Comcast is basically a utility, . . .

Actual utilities have two safety characteristics that arguably no longer apply to Comcast. The first is necessity, as in electricity or water. Cable was once pretty close to a necessity, but it’s not anymore.

The second is monopoly, generally on a local or regional level. That also applied to Comcast in the salad days of exclusive cable franchises, but as broadband becomes a larger part of its business, that’s no longer the case. It has a big head start with infrastructure in lots of places, but competition is growing from national wireless carriers, local telcos, and the lengthening list of outfits – public, private and nonprofit – that fall under the community broadband umbrella.

Google is experimenting with wireless broadband to the home through a receiver on the roof. Clearfield, which sells easy-to-install modular fiber cassettes and cabinets, reported 84% yoy sales growth yesterday. Its biggest market is community broadband. The CEO predicted more fiber-to-the-home connections will be made in the next five years than in history so far.

Conflating anecdotal customer experience with investment analysis is generally a bad idea, but my experience as a Comcast customer suggests their pricing is based very much on the consumer perception that they have a monopoly. They employ tactics like requiring rental of cheap modems, slowly but consistently raising the charge in nearly imperceptible increments, until one day you realize you have paid hundreds, maybe even thousands, of dollars for a piece of equipment you could buy for $100 or less.

In two jurisdictions where I recently lived, although Comcast was the broadband market share leader, rudimentary research revealed much better pricing for high-speed broadband from another vendor.

I don’t have as much faith in the invisible hand as some, but it seems to me that Comcast’s cable-era habit of constant price increases, combined with the inferior performance of broadband through shared cable feeds, might make its future cash flows a little less inevitable than they seem today. As a cash cow, it’s probably safe for a good long while, but I would venture that its competitive advantages are slipping away.

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Actual utilities have two safety characteristics that arguably no longer apply to Comcast. The first is necessity, as in electricity or water. Cable was once pretty close to a necessity, but it’s not anymore. The second is monopoly, generally on a local or regional level.

I’d argue that broadband is pretty much a necessity. In recognition of that, government subsidizes it for low-income households, something they don’t even do for water here in Michigan. As for monopoly, lots of places have competition among electricity and gas providers. They’re still utilities.

Yes, eventually fixed wireless, satellite, or other technologies may well surpass fiber to the home, but I don’t plan to own Comcast for another decade. I expect to reap a good profit over a 2-3 year horizon.

I dropped Comcast as a cable TV provider 3 years ago, after being a customer for more than 30 years. I stream on Roku to my heart’s content. No one “likes” Comcast. But where I live (and for many Comcast subscribers) there’s no practical alternative to its broadband service at a price that makes it worthwhile to switch.

My main point, though, is that the stock is stupid cheap at a p/e of 11. I stand by that assessment.

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