Comcast Could Benefit from Reduced Capital Intensity
Comcast ( CMCSA ) is the biggest U.S. cable provider with nearly 21% of the U.S. pay-TV market share. Comcast competes with satellite pay-TV providers like Dish Network ( DISH ) and DirecTV ( DTV ), cable companies like Time Warner Cable ( TWC ), and telecom operators like AT&T ( T ) and Verizon (VZ) in the pay-TV and broadband businesses.
Comcast recently released its Q4 2010 earnings and, based on positive revenue trends, sustained margins and reduction of capital intensity, we have increased our price estimate to $29.57 . Our price estimate for Comcast's stock stands at a roughly 15% premium to market price. Among the factors mentioned above, capital expenditures (or capital intensity) has witnessed notable changes. Here we highlight the impact this could have on Comcast's stock value.
Reduction in Capital Intensity
Comcast's capital expenditures increased in the early part of the decade as the company built the necessary infrastructure to compete with other prominent players. However, Comcast's capital expenditures have declined since 2007, coming down from 35% of gross profits in 2007 to about 23% of gross profits in 2010. This was a result of both absolute declines in capital spending as well as improved revenue trends.
Why are Comcast's capital expenditures declining in absolute terms? Comcast has been migrating to a digital network that requires less maintenance and upgrade costs compared to the traditional analog systems. On top of this, pricing of equipment has also dropped. Significant growth in capital expenditures may not be observed until Comcast decides to lay out a completely new infrastructure. Apart from this, improved revenue growth has also reduced measures of capital expenditures as a percentage of gross profits.
See our full analysis and $29.57 price estimate for Comcast
Improved Revenue Trends Aiding Cost Metrics
Although Comcast has been losing overall video subscribers, it has been able to grow both its digital video customer base as well as its high speed internet and digital voice business. These trends have sparked revenue growth. Additionally, Comcast is generating incremental revenue from the promotion of advanced services like HD/DVR and pay-per-view on top of reductions in piracy.
In short, the return on capital invested has improved and the company expects the low levels of capital expenditures to continue. We currently forecast capital expenditures (as % of gross profits) to remain flat in the years ahead, and note that Comcast may need to invest further as the industry becomes increasingly competitive. This could lead to slight rises in the absolute amount of capital expenditures as gross profits grow.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.
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