Comcast Corporation (CMCSA) Focuses on Organic Growth


There comes a time when a cable company, even as large as Comcast Corporation (NASDAQ:CMCSA), may get worried. When closing major acquisition deals becomes a challenge and customer ratings plummet, need for reform comes almost naturally. That time for reinventing a business has come for Comcast, but the major question is whether it will come through successfully.

After ending its pursuit of Time Warner Cable Inc (NYSE:TWC), Comcast has its focus on growing organically through improvement of its operations.

Areas that call for reforms

One interesting thing about Comcast is that the management of the company already has identified areas that require improvements. The company is facing pressure in the video business, thanks to aggressive promotion by rivals and the emergence of video streaming services. Comcast needs to weigh more on costs to create room for more earnings improvement. Customer service has turned out to be a problem area for Comcast, but the company has disclosed plans to increase investments in revamping customer experience.

The commitment to drive these reforms is already there and capacity for them also exists. For that reason, it is easy to conclude that it will only be a matter of time for things to start flowing in the right direction again.

Major overhang lifted

Comcast has formally ended its pursuit of a merger deal with Time Warner. The company had offered $45 billion to bring Time Warner under its wing, a move that was expected to raise its share in the Paid-TV market. The proposed merger of Comcast and Time Warner draw harsh criticism from other industry players who claimed it would distort the market balance, hurting almost everyone, especially customers.

The failure to close the merger deal with Time Warner comes as a blow to Comcast, but the company has also eliminated a major overhang in its operations. The company can now focus more on how to grow organically through cost cutting and operation improvements.

NBC Universal

Comcast Corporation (NASDAQ:CMCSA)’s NBC Universal has shown respectable profitability growth in recent times. However, competition exists in the video space, but the company can still drive more competitive advantage in its media and entertainment segments.

Xfinity:

There are indications that Comcast has more coming to Xfinity, for instance. The company is working out a potential deal with Shaw Communications of Canada. The pressure for Xfinity is the increased promotional activities by rivals, especially U-Verse.

The other headache for Comcast’s video business is the new wave of over-the-top TV, such as Sling TV. However, Comcast has hedged its video business through ownership of content assets.

Cable business

Comcast draws most of its revenue from cable operations, a segment that is also highly profitable. The company has key competitive advantages in the cable business.

Opportunity in a challenge:

The greatest current threat to cable companies is the so-called cord-cutting, where people are shifting to view television online. The rise of streaming TV services, such as Sling TV, PlayStation Vue, HBO Now and Netflix, Inc. (NASDAQ:NFLX) pose a threat to Comcast, the leading cable operator.

While there seem to be serious challenges for cable companies in the rise of alternative television services, there are also opportunities to be grabbed. Watching television over the Internet requires high-speed data connections, and Comcast has the capacity to provide that. As such, the more people move to watch TV online, the higher the demand for broadband will be, leading to more gains in the broadband front.

The other strategy that could save Comcast in the face of online TV is tiered broadband offerings, where customers are charged based on their consumption. Those who watch a lot of TV online would have to pay more and those who do less of online streaming would pay less. Such tiered broadband opens up the opportunity to increase broadband revenue.

For Comcast, cord-cutting may be a threat to cable companies, but it can also turn that challenge into an opportunity.

It is worth pointing out that Comcast’s cable margins have remained fairly stable and are likely to remain healthy over the long term.

Comcast can drive much more growth in the cable business by upselling existing customers than merely adding new customers. For example, it is more profitable when an existing customer upgrades to a higher broadband package.

Shareholder capital allocation

Abandoning the merger with Time Warner clears the way for Comcast to increase its capital allocation to shareholders. The company raised its buyback authorized by $2.5 billion, to $6.75 billion. The scale of the buyback authorization can be interpreted to mean that the company doesn’t have any major M&A in the pipeline. The repurchase authorization also shows disciplined capital allocation.

Minor M&A deals

It looks as if the company will only be interested in closing M&A deals that make much strategic and financial sense. Wireless acquisition is a possibility in the case of Comcast. T-Mobile US Inc (NYSE:TMUS) has been mentioned in connection with Comcast’s wireless assets acquisition.

Balance sheet situation

Comcast finished the first quarter with a cash balance of more than $3.9 billion. The company’s total long-term debt is nearly $43 billion at the end of the quarter. Comcast’s cash position is healthy enough to allow it flexibility in pursuit of growth.

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Areas of concern

Weak ad revenue:

Video ad spending has become weak industry-wide, and that poses a challenge for Comcast’s top-line story.

Poor customer rating:

Comcast Corporation (NASDAQ:CMCSA)’s customer service rating has plummeted, falling by nearly 10%, to 54 out of 100, in the latest survey. Poor customer service could spell doom for the company’s long-term, especially in areas such as ad revenue and in the battle with streaming TV services.

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According to Comcast’s Jenni Moyer, the Senior Director in charge of corporate communications, there is a plan to invest $300 million to improve the customer experience. The company will be hiring thousands of people and looking to make real change in the way that it interacts with customers.

Given the intense competition in the Paid-TV business, Comcast will need to move fast to drive favourable changes to win back the confidence of consumers and advertisers.

Conclusion

Comcast Corporation (NASDAQ:CMCSA)’s long-term is promising. The company only needs to stick with its reform commitments to improve operational efficiency, service offerings and customer satisfaction.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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