Professional Documents
Culture Documents
A Fundamental
Investor’s
Analysis of The
Past, Present &
Future:
By:
Introduction/Background
Tupelo, Mississippi in 1963. The company began as a single service cable provider and
grew to become one of the leading US firms in the industry of Cable television systems
(specifically the consumer sector). The company also ranks fairly high in the
telecommunications, broadcasting and box office ticket sales industry. Today the
company serves over 47 million customers including video, high-speed internet and
Comcast digital voice customers. The company now provides a wide rage of product and
consumer services including Comcast Business Class, Programming Group, and Comcast
Spectator. However, their main focus has consistently centered on delivering high
quality programming content and the development, organization and running of multiple
cable networks.
During the first 10 years or so, American Cable Systems grew at a relatively
modest pace. Eventually, the company changed the name to Comcast Corporation in
1969 and incorporated in Pennsylvania. By 1972 the company was ready to go public
and made its first public offering on the NASDAQ Stock Market. From there, the
company began to follow an aggressive investment strategy that not only expanded its
current business but enabled it to enter into numerous new business lines. The first major
investment was in 1986, when the company doubled its size with the acquisition of 26%
of Group W Cable. After that, the company went on acquire and invest in companies
such as: QVC, American Cellular Network Corporation (AMCELL), The Golf Channel,
Greater Philadelphia Cablevision, Home Team Sports (now merged with Comcast Sports
Net), AT&T Broadband, and more recently PBS, a joint venture with GE, and the E
networks. Today the company is the largest cable and home internet service provider in
the US. (the information presented in this section is from Ref. 1 and 2 listed in the
A typical mistake of the novel investor is that he/she doesn’t take the time to gain
far to abstract, if not outdated, to make a strong connection to the current market
statistics. At the same time, trying to look over too many pieces of information can make
your analysis extremely time consuming, complicated, and expensive if seeking outside
assistance (specializing in that industry). Some investors try to take the easy way out by
trusting that the market has done the work for them (passive), while others guess widely
based off of a gut feeling they have about a company (intuitive). The problem with
taking the easy way out; is the risk of paying too much for growth that doesn’t add value.
Even if the investor happens to make a good investment, the results cannot be duplicated
without knowing why or how the company got there. As a fundamental investor, I can
decrease my risk of paying too much and avoid information overkill by limiting my focus
to the major factors that affect this company and the industry in general. I summarized
The financial statements tell a story about value; the story of how the business
added or removed value, and how it has changed over a period of time. Unfortunately,
the statements do not tell the whole story. Luckily, I was able to fill in some of the gaps
for Comcast’s story by using my understanding of the business discussed above. The
current financial statements represent the middle of the story; they only tell where the
company is now. Present financial conditions affect only the investors and shareholders
who were already invested in Comcast at the time. For managers, new investors, and
is what the future financial performance and market position will be. The problem is that
we have no way of knowing with exact precision what the future will bring. The
solutions: form our own opinion, or estimates, about the future outcome, or follow the
The current stock market price is determined by the supply and demand that exists
within the market. That price is a reflection of the current market’s opinion of the
company. That opinion is based on a wide range of public and even private information;
some of which is directly related to the company (earnings, growth potential, etc.), while
others relate to the systematic risk that is outside of the company’s control. As
mentioned earlier, the problem with price is that it does not always represent value. Part
of that value is revealed in the current financial statements. To extract that value, I
information. I began my analysis by making a simple time series using the company’s
annual report for the prior four years (including management’s notes) and the FASB
Template. Included in that template were a number of other financial analysis tools that I
found to be extremely helpful. The information I analyzed from the trend, common size,
and ratio analysis, told me how the company had performed in the past and what
direction this company was heading. Once I understand the company’s internal
condition, I needed to know how Comcast rated when compared to the rest of the
industry. Using a number of financial ratios & statistics, such as the P/E ratio, I rated
Comcast position against each competitor (select individuals and the industry). To test
the accuracy of this benchmark I reviewed the opinions within the company, other
analysts, and the market in general. Using all of this information, I was finally ready to
evaluate Comcast in terms of its current market price, to determine the appropriate
Using the FSAP Template, I entered the financial data from the firm’s financial
statements, as reported in the Annual 10k report from 2004 to 2009 (2004 was included
in order to have a complete review for 2005). Once entered, I examined each statement
very carefully, noting general patterns and major year to year changes within each
statement and as a whole on the Data tab. I followed a similar procedure while looked
over the ratios, line item percentages, and growth rates on the Analysis tab. After
comparing notes, I quickly realized that year to year activity during that period was
extremely volatile. This volatility was directly related to the volatility in the US
extremely difficult to make a true assessment of the firm’s current and possible future
position. This inconsistency in Comcast’s financial statements decreases the validity and
reliability of the financial trend analysis and any averages that were calculated for
benchmarking purposes. In order to correct for this decrease, I identified each material
year to year variance and researched the cause of said variance. The majority of my
research utilized the management discussion and analysis section, the additional notes
and supplementary information sections filed with the consolidated financial statements,
which were all included in each year’s Annual 10K report. Once my research was
complete, I continued on with my analysis. The next four sections summarize and
highlight some of the more critical items that were uncovered in reading over the
financial statements.
Reviewing a firm’s balance sheet is critical to the valuation process. The balance
the financial condition of the business at one specific point in time, making it notably
unique from the other financial statements. While uncovering how the company has
historically positioned itself over the years; five of the line items were particularly
concerning; those line items were: cash & cash equivalents, marketable securities, PP&E,
further, I had to resolve the questions that each of these line items (and the overall BS)
“suggested.” The explanations to each of these questions are outlined below as follows:
1.) Why has there been an overall decline in the company’s most liquid assets? Is
this decline an indicator of increasing investment risk (liquidity and going concern
issues)?
-The market value of the firm’s securities has decreased primarily because of the
financial conditions within the market, and losses suffered on unusual items
-Liquidity and going concern risk does not pose a significant risk at this time. Free cash
sizeable credit line with its vendors to tap into for short-term liquidity needs.
4.) What are the “intangible franchise rights” and how does the company account for
these items?
-Intangible franchise fees are the rights the firm purchases in order to operate and offer
services to customers in that geographical area. As with PP&E, explained below, future
investments in these assets will likely decline as a result of the aggressive expansion
recorded. The firm annually tests these assets for impairment by using a discounted cash
flow analysis. So far, no impairments have been made. However, future impairments
could be possible if these rights were later limited due to changes in regulatory and
market conditions.
5.) Why has the growth rate in PP&E declined over the last few years?
-Capital expenditures for cable services, historically a very sizeable portion of all
investments, have gone down. Other operating investments were not significant.
-New customer growth rate for cable services has decline due to fewer customer
segments to market to (market saturation) and the downturn in the housing market
plans to use those funds for future investment, or are they contractually obligated to
-Part of the reason for maintaining the stock repurchase plan is for the NBC
$7.2 billion (expected to be paid at the end of 2010). This will give
Beyond the initial cash payment, the company will have the option to
purchase the remaining interest from GE, over two future redemption
periods using either cash or stock. The stock repurchase plan is expected
to continue until the remaining $3.3 billion approved is spent or the plan’s
-Increases were partially due to a number of new accounting and reporting requirements
-Additionally, lenders and creditors require that the company maintain certain financial
over a fixed period of time, broken out into operating and non-operating sections. The
statement reveals the capabilities of the firm in generating sales from current product/
services lines (plus additional non-operating items), and converting those sales into net
income. Net income represents the profit or residual claim that remains to common
shareholders (minus any preferred/minority interest), after subtracting out all of the
expense incurred over that same period to generate those revenues. A firm can increase
profitability by doing one or all of the following: increase the sheer volume of current
product lines (assuming marginal cost rates remains the same), create new product lines
that have higher profit margins, eliminate individual expenses or discontinue entire
business lines that do not add value, and reduce the negative impact of the those expense
that are core to operations (with efficient and effective process improvements).
Unfortunately, due to a number of limitations, the income statements provide only a weak
assessment of the present and future potential. These limitations will be listed below,
followed by a comparison of the best and worst years of financial performance, and a
-The decline in the US economy, created large variances in P&L line item accounts,
-Sales from cable services represent a large portion of the total sales revenue generated
by the company. Over the last few years, additional customer cable sales have gone
-Based on the balance sheet analysis, outside investments have also declined.
-The company has historically relied on its free cash flow from operating
programming fees and video programming fees. Rate increases are common and
Looking over the last five years, there are two years that visibly stand out among
the rest, 2006 & 2008. In 2006, the company had its overall best year of financial
performance. It was the only year in which the company was able to drive up sales
revenue, without marginally increasing every operating cost—thus converting more sales
into profits. The growth in sales relates to new customer subscriptions and pricing
markups for customer related fees. Expenses related to cable programming fee rates were
actually increased during this period, but, total expenses were maintained by the gains on
the sale of investment assets and the gain on discontinued operations. During this period,
the company’s stock was trading at an all time high (for year-end purposes) and investing
Two years later in 2008, the US economy saw its worst recession since the Great
market price, and sales and customer subscriptions growth over the prior year. Despite
these decreases, the company did have increases in terms of operating profit. The
increase was however limited due to increased operated expenses from supplier rate
increases. The reason net income fell below the prior year was due to investment losses
financial performance. Sales revenue increased for all of Comcast’s major business
sections. Operating profit also increase in both amount and as a percentage of sales—
partially due to streamlining operations (layoffs). Non operating income (loss) also
improved--interest expense decreased due to prior and current year debt retirements and
decreased in interest rates and investment income (loss) improved due to reported
investment gains (realized and unrealized). The company’s stock price was down
slightly, however, that may have been due to the larger dividends declared and paid out
during the year. Net income and earnings per share for common were at record highs,
even beating out 2006 figures. Looking at just the income statement dollar amounts, it
would appear that Comcast has bounced back and is moving in the right direction—
especially if comparing 2009 to 2008. On the other hand, Comcast’s rate of growth
actually declined below 2008 percentages, so their ability to generate additional earnings
or value is still declining. The problem in figuring out Comcast’s true position at this
point, is not knowing how much, (if any) of that decline is due to the depressed economic
conditions. The section “Comcast vs. The Competition” below helps to shed some light
Flow
The statement of cash flow shows which of the firm’s activities (operating,
investing, or financing) generated cash, where the company used those funds, and
explains how cash is affected by changes in the prior two statements. It is also very
useful in valuing the firm in terms of liquidity and solvency risk—both of which seemed
to be cause for concern after reviewing Comcast’s statements. The financing and
investing activities only provided little, if any, positive cash flow and even that was
declining. The net cash used by the investing activities is decreasing, while the cash used
by financing has been increasing since 2006. During that same time frame, the cash
provided by operations has been increasing at a declining rate. These trends combined
with few other liquid assets on the balance sheet and declining sales growth from the
leading business segment (cable) signal major cash flow problems ahead. If the returns
on current business lines continue to decline without support from new investments, the
company will be forced to sell off less liquid assets at possibly unfavorable prices (fire
sale) or default and face bankruptcy. In order to grasp the severity of the situation, I
needed to find out whether or not this was a normal position to have in the industry—to
that occurred over the period that affected stockholder equity. Although covered last, this
was the first statement I examined in order to find out how shareholder’s value had
changed, what were the causes of those changes, and what my share of it would be as a
common shareholder. Listed below are those items that would need to be reclassified for
valuation purposes.
-The company did not have any issued or outstanding preferred stock holders.
-From the dividends declared, the amount unpaid at year end would need to be
-The company uses grant date accounting for its share based compensation
expense and employee stock option. Deferred compensation for the share based
-The 3.3 billion shares authorized to be repurchased could have an effect on future
of financial ratios and calculations---listed below are those which I found to be most
-Liquidity Measures
Current and Quick Ratios: .44 & .34. Typically an amount less then one could
Net Working Capital Days: -73. Although negative it was showing yearly
improvement.
-Solvency Measures
-Altman Z Score: 1.3. A score below 1.8 generally means the probabilities of
financial leverage, more assets were financed with equity then debt, less risk of
-Profitability
-ROA & ROCE excluding nonrecurring items: 16.7 & 8.7. Both figures have
-P/E and P/B: 13.28 and 1 to 1. Both ratios have dropped since 2005.
For this section, I reviewed the statistics from Tables 2-6 which are provided in
the Appendix. This information was provided by Yahoo! Finance (Ref. 3) using
information available from December 2010. Comcast ranked relatively low against the
industry leaders. However, many of these leaders were competing in entirely different
customer markets (BSY. L a British Company), and so were not as reliable for
benchmarking purposes. The company did rank fairly high in terms of market
capitalization when ranked against the top cable and television companies. Market
capitalization is equal to the number of shares the firm has outstanding times its market
value. This statistic is useful in determining a company’s relative size in the market.
Currently Comcast still ranks highest against other US competitors. The company does
beat its direct competitors in terms of sales and profit margins, but it scores the lowest in
terms of EPS and quarterly revenue growth. The company’s P/E, ROA and ROE ratios
also rank fairly low when compared against the industry and direct competitors. To test
my liquidity concerns I reviewed the current ratio, operating cash flow and leveraged
cash flow ratios from the tables. Comcast had the lowest current ratio and had the least
percentage of funds left over from operating cash flow after debt payments (leveraged
free cash flow)—this only seemed to indicate further that Comcast was facing high
liquidity risk.
valuation analysis. For sales revenue, I assumed growth would continue to show decline
at an increasing rate from forward years 1-5, with no long run growth expected. Due to
increasing rate yearly. I used the percentage of revenues from 2009 for all other income
statement line items except tax, which I calculated based on the average reflected in years
share. At the end of 2009 Comcast was trading at $16.86 per share. Currently the stock
market price is $20.60 per share. Had this analysis occurred at the end of 2009, I would
have recommended a buy strategy or a hold for those currently invested. At this time, I
would recommend holding off on making any additional investments at the current
market price. For current investors, I would still recommend a hold strategy. Overall, I
would recommend paying very close attention to US economic decisions. The company
has a beta of 1.2 (Yahoo!); which means that changes in the firm’s financial performance
will tend to mirror those seen in the US market. This mirrored effect was made even
more evident by the volatility in Comcast’s financial performance over that the last 5
years. As a final piece of advice, I would advise lenders and creditor to be weary of
increasing their lines of credit with Comcast. The firm might begin running into cash
flow shortages in the near future (forecast and valuation shown in the Supplemental
Information section).
-Cable sales growth is going to continue to decline and profit percentages are going down
due to rate increases. In order to increase operating profitability, the company must find
new investment opportunities with value added return. In addition, look for investments
with less supplier power so that you can better manager your expense and profit margins
-Increase investment in intellectual assets to create new products and service lines and,
-Expand into new markets outside of the United States to add some protection against
Strengths Weaknesses
-The firm is a leader in the U.S. cable -Suppliers are highly concentrated,
services industry. substitute products are limited—strong
pricing and overall market power
-The company serves more areas and has -The licensing fees charged by
more customers than any other cable programming networks are singlehandedly
service provider in the US. the largest operating expense for Comcast.
-Able to enjoy both economies of scale and -Similarly, video programming expenses
scope. related to retransmission fees also represent
a large chunk of Comcast’s total operating
expenses.
-Able to cross-sell multiple products within . -Very long wait times to even reach a
their customer base. representative.-Reputation as one of the
worst in customer satisfaction (esp. in
service)—Ranked # 1 twice in 04 & 07 by
The American Customer Satisfaction
Index.
-Strong brand name recognition -Frustration once representatives were
reached because they were poorly trained,
unprofessional, and rude to the point of
abusive in some cases.
-Division integration, open communication, -Numerous customer fee rate increases.
and an entrepreneurial spirit within the Relatively low switching fees and short
firm. contract periods
-Able to generate a lot of new/improved -No significant investments in customer
programming innovations and get them to markets outside of the US-at risk for
market quickly (high Idea/Product market fluctuations.
Turnover).
Opportunities Threats
-The firm’s expansive operations allow -Rates charged for both video programming
them to develop new product lines in and licensing fees are expected to go up in
multiple categories. the future.
-The joint venture with GE that was -This would likely force the company to
finalized at the end of December 2009 can pass some of this increase along to the
significantly increase Comcast’s revenue customer, via higher service fees.
potential.
-The combined assets and skills of the two -Higher fees will strengthen their already
companies will give Comcast an even poor customer satisfaction reputation and
stronger competitive advantage in the negatively impact their customer base.
entertainment and media industry.
-The company will be able to service a -The company’s main industry,
wider ranges of their current customer cable/TV/video industry is highly
needs, while opening themselves up to competitive and intensifying. Harder to
entirely new customer markets gain sales—closing in on market potential.
-The number of citizens in the U.S who -The co. faces equally tough competition as
have regular internet access continues to it moves farther into the
increase, as does the time the average telecommunications industry.
American citizen spends on the internet. Additionally, the struggle to gain market
share & brand recognition is going up as
the fight for advertising space increases.
-This will enable the company to offer -The industry is highly regulated at the
services such as 4G high speed internet, to state, federal and even local levels—future
a much broader area. regulations pose a serious risk to Comcast’s
future operating performance.
-As access and usage increases, Comcast -Services demanding customers, in a highly
can create highly customized consumer technologically dependent industry—one
offerings—with greater profit margins. new competitor innovation could quickly
wipe Comcast out of an entire costumer
segment (i.e. visibly better programming or
faster internet speeds).
Table 2: Comcast VS. The Industry
References
Ref.1:
http://www.comcast.com/corporate/about/pressroom/corporateoverview/comcasttimeline/
comcasttimeline.html#1963
Ref. 2: http://en.wikipedia.org/wiki/Comcast#Financial_performance
Ref. 3: http://finance.yahoo.com/q/co?s=CMCSA+Competitors
Ref. 4: http://www.cxoadvisory.com/equity-premium/the-2010-equity-risk-premium-
Supplemental Information
Comcast Income Statement Forecast