Can Comcast Keep Growing?

With shares of Comcast (NASDAQ:CMCSA) trading around $51, is CMCSA an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Comcast is a provider of entertainment, information, and communications products and services. The company operates in five segments: cable communications, cable networks, broadcast television, filmed entertainment, and theme parks. Comcast offers television, video, high-speed Internet, and voice services to residential and business customers. It also operates NBC and Telemundo broadcast networks; provides filmed entertainment under the Universal Pictures, Focus Features, and Illumination names; and operates theme parks, studios, and a dining, retail, and entertainment complex.

Comcast and Time Warner Cable (NYSE:TWC) have announced that should their mega-merger be approved by regulators, Comcast will divest approximately 3.9 million subscribers to Charter Communications (NASDAQ:CHTR), which will make Charter leapfrog Cox Communications to become the nation’s second-largest cable operator, behind the beefed up Comcast. The companies announced the deal on Monday morning. Comcast and Charter will complete the deal in three separate transactions. The first transaction will involve Comcast selling Charter 1.4 million Time Warner Cable customers for cash, though how much it would cost Charter was not revealed. The second transaction will involve Charter and Comcast swapping 1.6 million customers, which will result in “improving the geographic presence of both companies, leading to greater operational efficiencies, improved technology deployment and enhanced customer service,” according to a joint press release from two cable operators.

The third transaction involves Comcast creating a new publicly owned cable company called SpinCo that will consist of 2.5 million current Comcast subscribers. Comcast and Time Warner shareholders — which will be just Comcast shareholders should the merger go through — will own 67 percent of SpinCo, while shareholders of the new Charter will own 33 percent of the company. Comcast will have no ownership interest in SpinCo, which will be managed entirely by Charter. These three deals will result in the merged Comcast-Time Warner entity only owning about 30 percent of the total U.S. cable market, according to the companies’ press release. Comcast said that even with these transactions with Charter, the merger with Time Warner will still result in $1.5 billion in operating efficiencies, and Comcast shareholders will receive value through shares in SpinCo.

In an investor presentation on the deals, provided by Reuters, the companies estimated that SpinCo’s enterprise value would be around $14.3 billion. “Today’s Agreement follows through on our willingness to divest subscribers, while also marking an important step in our merger with Time Warner Cable,” Comcast CEO Brian Roberts said in a press release. “These transactions enable us to deliver meaningful value to our shareholders. The realignment of key cable markets achieved in these transactions will enable Comcast to fill in our footprint and deliver operational efficiencies and technology improvements.”

T = Technicals on the Stock Chart Are Mixed

Comcast stock has struggled to make significant progress over the last couple of months. However, the stock is currently trading near all time highs and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Comcast is trading between its rising key averages which signal neutral price action in the near-term.

CMCSA

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Comcast options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Comcast options

18.98%

3%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Comcast’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Comcast look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

31.48%

27.92%

-16.67%

30%

Revenue Growth (Y-O-Y)

13.70%

6.21%

-2.38%

6.96%

Earnings Reaction

1.90%

1.63%

-1.29%

5.54%

Comcast has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Comcast’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Comcast stock done relative to its peers, Time Warner Cable (NYSE:TWC), DirecTV (NASDAQ:DTV), Dish Network (NASDAQ:DISH), and sector?

Comcast

Time Warner Cable

DirecTV

Dish Network

Sector

Year-to-Date Return

-1.34%

3.24%

10.69%

-2.31%

3.57%

Comcast has been an average performer, year-to-date.

Conclusion

Comcast provides communications and entertainment products and services to consumers and companies. The company and Time Warner Cable have announced that should their mega-merger be approved by regulators, Comcast will divest approximately 3.9 million subscribers to Charter Communications. The stock has struggled to make significant progress over the last couple of quarters, but is currently trading near all time highs. Over the last four quarters, earnings and revenues have been on the rise, which has left investors pleased. Relative to its peers and sector, Comcast has been an average year-to-date performer. WAIT AND SEE what Comcast does this quarter.

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