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Tuesday, February 18, 2014
Comcast Agrees to Buy Time Warner Cable for $45.2 Billion- 02/21/2014
Operating segments (% of total rev and % of total NI) Cable Communications, 65%& 80%, which consists of the operation of Comcast cable- the nation's largest provider of video, high speed cable services to residential customers and businesses. Cable Networks, 14%& 24% consists primarily Comcast cable networks,TV production studio and related digital media properties, license broadcast rights to distributors and ultimately targets at TV audience. Broadcast TV, 11%& 2% NBC and Telemundo owned local stations, and other related digital media properties Filmed entertainment, consists of operations of Universal Pictures, which produces and distributes films, customers include theaters and DVD buyers. Theme parks 3%& 5%, provides Universal theme parks amusement to visitors.Corporate and others -1%& -4%.
Highlights In the 4Q13, Consolidated rev increased 6.2%， OCF up 7%, OI up 10.7% from 3Q13, EBITDA 33%, NI 11%.
Industry average (2012 Bloomberg) Sales 6%, Operating income -7.3%, EBITDA % 29.4%, Profit margin 5.6% Comcast has higher growth ratios, and higher profitability ratios
FCF: 8.5 B in 2013, 13% of rev and 40% of OCF Uses of FCF - Maintenance CapEx 31% of OCF, Expansion CapEx 9% of OCF - EPS $2.56, and Dividends payment 9% of OCF - Purchase of NBCUniversal minority stake 10 B, 47% of OCF - Pay down of debt 11% of OCF - Share repurchase 9% of OCF.
Relative valuation Comcast is valued at P/E 21, P/FCF 24, EV/EBITDA 8.4 Industry average (4Q13) P/E 24.1, P/FCF 27, EV/EBITDA 10.5 TWC was purchased at EV/EBITDA of 7.9 Based on relative valuation, Comcast's shares are trading at a slight discount, and TWC was a good deal.
Basic video subscribers: Comcast 22M, TWC 11M, Cox, distant 3rd with 4 M Share repurchase authorization of 10 B in 2013 and 2014.
TWC deal
Upside - Migration to digital forms, most subscribers opt for HD and other advance services, which may drive average rev per customer higher. - TWC deal helps Comcast to cross sell its products to current customers, and post-merger Comcast will have leading shares in most urban regions.
Downside - Online video service providers such as Netflix is gaining in popularity. In addition, newer services and distributors start to produce and acquire their own orignial content. Those factors will steal revenues from Comcast. - Increasing competition with Telecoms, such as AT&T and Verizon. Because this industry exists a decreasing cost of scale, so the competition will only get more intensified in the future. Comcast's pricing power will weaken unless it can reverse the decline in its subscribers. -Regulatory: TWC deal needs approval from FCC, Anti-trust agency approvals.
Conclusion Hold. Comcast is reasonable valued with foreseeable upside benefits, but whether it can successfully integrate TWC's business and change its image problem will determine its future success.
Sources: - 2012 10K - 2013 full year earnings press release - Conference Transcript - Morningstar
Business Overview: It has two main business segments: - Cable communications segment: 65% of revenue in 2013, 80% of operating income - NBCUniversal Segment: 37% of revenue in 2013, 20% operating income Largest business and profit driver: Cable communications: 5.6% increase mainly due to solid growth in the residential businesses and continued strength in business services - Video: 49% of segment revenue - High-speed internet 25%,8% increase vs. 2012, largest contributor to cable revenue growth - Voice: 9% - Business Services:8%, critical growth driver: 26% increase vs. 2012 - Advertising:5% - Other 4% NBCUniversal: - Cable Networks: 39% of segment revenue - Broadcast Television30% - Filmed Entertainment 23% - Theme Parks 9% - Headquarters, Other and Eliminations -2% Customers: Comcast offer a variety of cable services to residential and business customers, customer base increased 3.4% over the previous year. - Video customers:41% of combined vedio, HIS and Voice customers - High-speed internet customers: 39% - Voice:20%
Financial Overview: - Free Cash Flow: increased 6.9% in 2013, reflecting growth in consolidated operating cash flow and improvements in working capital. 80% of OCF from cable communications & 20% from NBCUniversal 2013 2012 2011 2010 FCF % of revenue 13.13% 12.69% 14.48% 14.98% FCF % of OCF 46% 55% 54% 51% • Use of FCF: 24% used for dividends and 24%shares repurchase; 29% used for debt repayment; paid 16.7b to acquire full ownership of NBCUniversal ; capital expenditure: increased 15.4% to $6.6 billion - ROE:13.22; ROA:4.29: both gradually improved throughout the year, while lower than industry avg. - D/E remained around0.88 throughout the year;
Risks: - Increasing programing expenses increased more than 10% in 2013. - Competition from online video streaming services provider, may hurt cable communication business
Source: Bloomberg, 10k, ---Segments Cable: 65% of total revenue, 80% of operating income Video: 32%, High-speed Internet: 16%, Phone: 6%, Other: 11% NBC universal: 37%, 24% Cable networks: 14%, Broadcast television: 11%, Filmed entertainment: 8% Others: -1%
Rev growth rate: 47% in 2011, 12% in 2012, 3% in 2013 TWC: 5 yr CAGR: 4.4% NI growth rate: unstable. 14% in 2011, 50% in 2012, 10% in 2013 TWC: 5 yr CAGR: 13%, -10% in 2013
---Customers: home residents and business users who need video, internet and phone service. Numbers of subscribers in 2013 Video: 41%, Internet: 39%, Phone: 20% The estimation shows that in 2015, the internet users will be greater than video users.
---ROE: 13.6% in 2013 Industry avg: 22.6%, TWC: 27.5%, Dish: 179%
---FCF/Rev: 8.8% in 2013, 14.6% in 2012, 16.2% in 2011 FCF/CFO 40% in 2013, 61.5% in 2012, 63% in 2011
---Use of FCF: Dividend: 1.6 B in 2012 18% of FCF Share repurchase: 3B, 33% CapEx: 5.7B, 62%
---Risks: Traditional TV industry decline Higher plan price may lose cable TV users (avg of monthly payment: $151.3) The Comcast cable TV subscribers decline 1.4%. TWC declined 7%. Reputation Potential monopoly
Data sources: 2012 annual report; 2013 4th quarter report; MorningStar.com; Thomson One Database; Seeking-alpha.com
Business Structure (Two primary business and five reporting segments)
Comcast Cable • Cable Communication 64% 41% (2012) NBC Universal Revenue • Cable Networks 14% 38% (2012) • Broadcast Television 11% 5% (2012) • Filmed Entertainment 8% 2% (2012) • Theme Parks 3% 46% (2012) • Cable Communication/ two thirds revenue and 80% of EBITDA • Internet access business/ more than 50% share
Customers • Internet users/residential customers; commercial customers • TV and film audience • Tourists
Free Cash Flow • 2011 14% of revenue; 56% of CFO • 2012 13% of revenue; 55% of CFO • 2013 10% of revenue; 46% of CFO • Decreased due to higher spending in working capital
Usage of free cash flow • Debt repayment 37% Declined 15% • Common stock repurchased 31% Declined 33% • Dividend paid 33% Declined 5% • Purchases of investments 48% Increased 8 times • Purchases of intangibles 15% Increased 9%
Risk • Competition from satellite providers phone companies, and internet companies
2 Business Segments (Revenue %, Operating Cash Flow %) Fiscal year 2013
- Cable Communications (64% of 2013 revenues and 79% of operating cash flow) - NBC Universal (36%; 21%) --- Cable networks (39% of NBCU's total 2013 revenues and 74% of operating cash flow), --- Broadcast television (30% and 7%), --- Filmed entertainment (23% and 10%), --- Theme parks (9% and 21%), and --- Other (-1% and -12%).
CORE BUSINESS - Cable Communications
- FY 2013, Cable revenue increased 5.6% to $41.8 billion compared to $39.6 billion in 2012,
COMPETITIVE LANDSCAPE.
- On the cable communication side, DirecTV Group and DISH Network Verizon AT&T - On the NBCU side, Disney, CBS, Viacom and Sony.
FINANCIAL DATA Free Cash Flow: - FCF in FY 2013 $8.4 billion increase 6.9% from 2012 - FCF/OCF 63% in 2013 there are 3% decrease from 2012 - FCF/Revenue 13% in 2013 there are 1% iccrease from 2012 - Use of FCF:
1. Capital Expenditure: FY 2013, capital expenditures increased 15.4% to $6.6 billion compared to the prior year. 2. Pay Dividend & Repurchase, Dividends and Share Repurchases Totaled $4.0 Billion in 2013 3. Pay down debt: pay down its $44 billion in debt
Pricing power & Penetration: - High penetration rates with the video business having a rate of 43%, voice business having a penetration rate of 18%. - Pricing Power: the company continues to have significant pricing power with video revenues rising 2.9% despite a slightly smaller customer base while high-speed internet revenue was up an impressive 7.9%.
INVESTMENT RATIONAL/RISK PRO - Acquisition of NBC Universal. - Next-generation Xfinity TV, an on-demand, Web-based service - Streampix
CON - Online video streaming service providers - Comcast is the growing programming expenses - NBCU could become a serious distraction for Comcast management - Competition in cross-selling
Sources: Bloomberg, 10K, 10Q, Trefis
ReplyDeleteReference items (13 FY Rev 64.7 B, OCF 21.4 B, FCF 8.5 B, EPS $2.56).
Operating segments (% of total rev and % of total NI)
Cable Communications, 65%& 80%, which consists of the operation of Comcast cable- the nation's largest provider of video, high speed cable services to residential customers and businesses.
Cable Networks, 14%& 24% consists primarily Comcast cable networks,TV production studio and related digital media properties, license broadcast rights to distributors and ultimately targets at TV audience.
Broadcast TV, 11%& 2% NBC and Telemundo owned local stations, and other related digital media properties
Filmed entertainment, consists of operations of Universal Pictures, which produces and distributes films, customers include theaters and DVD buyers.
Theme parks 3%& 5%, provides Universal theme parks amusement to visitors.Corporate and others -1%& -4%.
Highlights
In the 4Q13, Consolidated rev increased 6.2%， OCF up 7%, OI up 10.7% from 3Q13, EBITDA 33%, NI 11%.
Industry average
(2012 Bloomberg) Sales 6%, Operating income -7.3%, EBITDA % 29.4%, Profit margin 5.6%
Comcast has higher growth ratios, and higher profitability ratios
FCF: 8.5 B in 2013, 13% of rev and 40% of OCF
Uses of FCF
- Maintenance CapEx 31% of OCF, Expansion CapEx 9% of OCF
- EPS $2.56, and Dividends payment 9% of OCF
- Purchase of NBCUniversal minority stake 10 B, 47% of OCF
- Pay down of debt 11% of OCF
- Share repurchase 9% of OCF.
Relative valuation
Comcast is valued at P/E 21, P/FCF 24, EV/EBITDA 8.4
Industry average (4Q13) P/E 24.1, P/FCF 27, EV/EBITDA 10.5
TWC was purchased at EV/EBITDA of 7.9
Based on relative valuation, Comcast's shares are trading at a slight discount, and TWC was a good deal.
Basic video subscribers: Comcast 22M, TWC 11M, Cox, distant 3rd with 4 M
Share repurchase authorization of 10 B in 2013 and 2014.
TWC deal
Upside
- Migration to digital forms, most subscribers opt for HD and other advance services, which may drive average rev per customer higher.
- TWC deal helps Comcast to cross sell its products to current customers, and post-merger Comcast will have leading shares in most urban regions.
Downside
- Online video service providers such as Netflix is gaining in popularity. In addition, newer services and distributors start to produce and acquire their own orignial content. Those factors will steal revenues from Comcast.
- Increasing competition with Telecoms, such as AT&T and Verizon. Because this industry exists a decreasing cost of scale, so the competition will only get more intensified in the future. Comcast's pricing power will weaken unless it can reverse the decline in its subscribers.
-Regulatory: TWC deal needs approval from FCC, Anti-trust agency approvals.
Conclusion
Hold. Comcast is reasonable valued with foreseeable upside benefits, but whether it can successfully integrate TWC's business and change its image problem will determine its future success.
Sources:
ReplyDelete- 2012 10K
- 2013 full year earnings press release
- Conference Transcript
- Morningstar
Business Overview:
It has two main business segments:
- Cable communications segment: 65% of revenue in 2013, 80% of operating income
- NBCUniversal Segment: 37% of revenue in 2013, 20% operating income
Largest business and profit driver: Cable communications: 5.6% increase mainly due to solid growth in the residential businesses and continued strength in business services
- Video: 49% of segment revenue
- High-speed internet 25%,8% increase vs. 2012, largest contributor to cable revenue growth
- Voice: 9%
- Business Services:8%, critical growth driver: 26% increase vs. 2012
- Advertising:5%
- Other 4%
NBCUniversal:
- Cable Networks: 39% of segment revenue
- Broadcast Television30%
- Filmed Entertainment 23%
- Theme Parks 9%
- Headquarters, Other and Eliminations -2%
Customers: Comcast offer a variety of cable services to residential and business customers, customer base increased 3.4% over the previous year.
- Video customers:41% of combined vedio, HIS and Voice customers
- High-speed internet customers: 39%
- Voice:20%
Financial Overview:
- Free Cash Flow: increased 6.9% in 2013, reflecting growth in consolidated operating cash flow and improvements in working capital. 80% of OCF from cable communications & 20% from NBCUniversal
2013 2012 2011 2010
FCF % of revenue 13.13% 12.69% 14.48% 14.98%
FCF % of OCF 46% 55% 54% 51%
• Use of FCF: 24% used for dividends and 24%shares repurchase; 29% used for debt repayment; paid 16.7b to acquire full ownership of NBCUniversal ; capital expenditure: increased 15.4% to $6.6 billion
- ROE:13.22; ROA:4.29: both gradually improved throughout the year, while lower than industry avg.
- D/E remained around0.88 throughout the year;
Risks:
- Increasing programing expenses increased more than 10% in 2013.
- Competition from online video streaming services provider, may hurt cable communication business
Source: Bloomberg, 10k,
ReplyDelete---Segments
Cable: 65% of total revenue, 80% of operating income
Video: 32%, High-speed Internet: 16%, Phone: 6%, Other: 11%
NBC universal: 37%, 24%
Cable networks: 14%, Broadcast television: 11%, Filmed entertainment: 8%
Others: -1%
Rev growth rate: 47% in 2011, 12% in 2012, 3% in 2013
TWC: 5 yr CAGR: 4.4%
NI growth rate: unstable. 14% in 2011, 50% in 2012, 10% in 2013
TWC: 5 yr CAGR: 13%, -10% in 2013
---Customers: home residents and business users who need video, internet and phone service.
Numbers of subscribers in 2013
Video: 41%, Internet: 39%, Phone: 20%
The estimation shows that in 2015, the internet users will be greater than video users.
---Market share:
Comcast: 21%, DirecTV: 16%, TWC: 11%, Dish network: 8%
---Margins:
Gross margin: 70%, Operating profit margin: 21%, Net profit margin: 11%
Industry avg: 10.1%, TWC: 8.8%, DirecTV: 9%, Dish: 5.7%
---ROE:
13.6% in 2013
Industry avg: 22.6%, TWC: 27.5%, Dish: 179%
---FCF/Rev:
8.8% in 2013, 14.6% in 2012, 16.2% in 2011
FCF/CFO
40% in 2013, 61.5% in 2012, 63% in 2011
---Use of FCF:
Dividend: 1.6 B in 2012 18% of FCF
Share repurchase: 3B, 33%
CapEx: 5.7B, 62%
---Risks:
Traditional TV industry decline
Higher plan price may lose cable TV users (avg of monthly payment: $151.3)
The Comcast cable TV subscribers decline 1.4%. TWC declined 7%.
Reputation
Potential monopoly
This comment has been removed by the author.
ReplyDeleteData sources: 2012 annual report; 2013 4th quarter report; MorningStar.com; Thomson One Database; Seeking-alpha.com
ReplyDeleteBusiness Structure (Two primary business and five reporting segments)
Comcast Cable
• Cable Communication 64% 41% (2012)
NBC Universal Revenue
• Cable Networks 14% 38% (2012)
• Broadcast Television 11% 5% (2012)
• Filmed Entertainment 8% 2% (2012)
• Theme Parks 3% 46% (2012)
• Cable Communication/ two thirds revenue and 80% of EBITDA
• Internet access business/ more than 50% share
Customers
• Internet users/residential customers; commercial customers
• TV and film audience
• Tourists
Free Cash Flow
• 2011 14% of revenue; 56% of CFO
• 2012 13% of revenue; 55% of CFO
• 2013 10% of revenue; 46% of CFO
• Decreased due to higher spending in working capital
Usage of free cash flow
• Debt repayment 37% Declined 15%
• Common stock repurchased 31% Declined 33%
• Dividend paid 33% Declined 5%
• Purchases of investments 48% Increased 8 times
• Purchases of intangibles 15% Increased 9%
Risk
• Competition from satellite providers phone companies, and internet companies
M&A of TWC
• Financial synergy/ lower financial cost
• Operating synergy/ increase operating profit margin
CORPORATE OVERVIEW
ReplyDelete2 Business Segments (Revenue %, Operating Cash Flow %) Fiscal year 2013
- Cable Communications (64% of 2013 revenues and 79% of operating cash flow)
- NBC Universal (36%; 21%)
--- Cable networks (39% of NBCU's total 2013 revenues and 74% of operating cash flow),
--- Broadcast television (30% and 7%),
--- Filmed entertainment (23% and 10%),
--- Theme parks (9% and 21%), and
--- Other (-1% and -12%).
CORE BUSINESS - Cable Communications
- FY 2013, Cable revenue increased 5.6% to $41.8 billion compared to $39.6 billion in 2012,
COMPETITIVE LANDSCAPE.
- On the cable communication side, DirecTV Group and DISH Network Verizon AT&T
- On the NBCU side, Disney, CBS, Viacom and Sony.
FINANCIAL DATA
Free Cash Flow:
- FCF in FY 2013 $8.4 billion increase 6.9% from 2012
- FCF/OCF 63% in 2013 there are 3% decrease from 2012
- FCF/Revenue 13% in 2013 there are 1% iccrease from 2012
- Use of FCF:
1. Capital Expenditure: FY 2013, capital expenditures increased 15.4% to $6.6 billion compared to the prior year.
2. Pay Dividend & Repurchase, Dividends and Share Repurchases Totaled $4.0 Billion in 2013
3. Pay down debt: pay down its $44 billion in debt
Pricing power & Penetration:
- High penetration rates with the video business having a rate of 43%, voice business having a penetration rate of 18%.
- Pricing Power: the company continues to have significant pricing power with video revenues rising 2.9% despite a slightly smaller customer base while high-speed internet revenue was up an impressive 7.9%.
INVESTMENT RATIONAL/RISK
PRO
- Acquisition of NBC Universal.
- Next-generation Xfinity TV, an on-demand, Web-based service
- Streampix
CON
- Online video streaming service providers
- Comcast is the growing programming expenses
- NBCU could become a serious distraction for Comcast management
- Competition in cross-selling