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Monday, August 07, 2006

Comcast: Stretching A Triple Into A Home-Run


Of the twenty stocks most widely held in accounts at Merrill Lynch, the best performer this year is Comcast, up 34.4%. That is ahead of big oil companies like Chevron (up 15.7%) and ExxonMobil (up 22.3%). It is also ahead of its rivals in the telco world like AT&T (up 26.5%) and Verizon (up 12.1%).

Comcast is run by the Roberts family, which owns voting control of the company. But it is run, in large part by Stephen Burke, son of former CapitalCities/ABC CEO Dan Burke. CapCities was arguably the most successful media company of the last quarter of the 20th Century. Its stock rose like a rocket over the years the company was operated by Burke and Dan Murphy and it assembled one of the great collections of radio and television stations,a TV network, cable properties, newspapers and magazines. The company was acquired by Disney and Michael Eisner proceeded in selling off many of the properties and driving the rest into the ground.

Burke-the-younger appears to have inherited his father’s skills as an executive. Comcast is now the largest operator of cable systems in the U.S. and has the opportunity to drive the famous “triple play” of combining cable TV, broadband and VoIP down the throats of competitors like AT&T and Verizon. As the Wall Street Journal recently pointed out, satellite TV operators DirecTV and EchoStar are losing their subscriber growth rates because they cannot offer broadband access and VoIP. The IPTV build-outs that will allow consumers to offer television over fiber-to-the-home are still several years away from being broadly available enough for the likes of Verizon and AT&T to use them as an effective weapon against cable companies. The telco will also have spent billions of dollars for fiber installations not certain that if they build it customers will come.

One of the great advantages of Burke’s strategy at Comcast is that he got the company out to an early lead. Comcast will have 23.3 million cable subscribers after it adds the customers it will get from the assets purchased with Time-Warner from bankrupt Adelphia. Time-Warner Cable has only 14.4 million.

Comcast has exploited its inherent advantages over the telcos in broadband. Phone company DSL tends to be much slower than cable broadband, and Comcast has been above to convince customers to pay a stronger price point for the better service. It has also put itself in a place where many customers may not even consider fiber-to-the-home. Once a consumer has a car that will do 100 mph, does he really want to go to the trouble to replace it will another model that does 200 mph? What’s the use? A connection only needs to be so fast for most customers.

Comcast is also adding phone customers to its VoIP service at an increasing rate. According to Morningstar, phone customers in the last quarter grew 50% faster than they did in the immediately previous quarter. Comcast is hurting the telephone companies, badly, in their core business, long before they can counter-attack with TV services.

Comcast has also cut deals with large video content providers to build an impressive video-on-demand library, another factor in keeping it customers.

Comcast’s stock has risen from a 52-week low of $25.35, to its current price near $35, just below its 52-week high. In the June quarter, the company did $6.23 billion in sales up from $5.9 billion in the immediately previous quarter ending in March. Operating income went from $1.05 billion to $1.23 billion over the same period. The stock now trades at 3.1 times sales. That is almost twice the price to sales number at satellite TV companies like DirecTV and EchoStar, and it should be.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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