Conventional wisdom is once again being disproved by financial reports. Comcast’s (NASDAQ: CMCSA) most recent earnings report shows us that reports of cable’s demise are greatly exaggerated.
Comcast’s revenues grew by $5.89 billion over the course of 2016. The cable and network TV operator began the year with revenues of $74.51 billion in December 2015 and ended it with $80.40 billion. That hardly looks like the earnings report of a company in a dying industry.
Comcast is making a lot of Money
Nor was it just revenue, Comcast is making a lot of money off of cable. It reported a net income of $8.695 billion on December 31, 2016 up from $8.163 billion a year earlier. To that figure we can add these numbers for December 31, 2016:
- A profit margin of 10.92%.
- A free cash flow of $2.647 billion.
- Assets of $180.40 billion
- Cash and short-term investments of $5.073 billion.
- $19.24 billion in cash from operations.
These are the numbers of a very healthy company in a growing or stable not a troubled organization in a dying industry. Such numbers also raise skepticism of the popular contention that vast numbers of people are “cutting the cord;” and pitching the cable box.
Are Americans Really Cutting the Cord?
The huge amount of float that Comcast is generating indicates that a lot of Americans are still paying their cable bills every month. There’s also some statistical evidence out there that indicates the level of cord cutting has been greatly exaggerated.
The number of Americans subscribing to pay TV in 2015 was actually higher than it was in 2005; data from Leichtman Research Group indicates, Adweek reported. Leichtman’s research found that the percentage of American households that opted out of cable in 2015 was 2.5% hardly a dying industry.
Nor are next generation digital platforms like Netflix (NASDAQ: NFLX), Hulu and YouTube necessarily a threat to cable. A survey by Cut Cable Today found that two thirds (66%) of Netflix subscribers still maintained cable service.
Why Aren’t People Cutting the Cord?
What is going on here, why aren’t Americans switching to the better cheaper option of digital video and throwing the cable box out? Here are a few potential reasons for the continued allegiance to cable:
- Television is essentially a recreational activity. Choosing or streaming a digital video takes time and effort. Flipping channels on the remote is easier.
- Ingrained habits. Television has been around for nearly 80 years, cable TV for over 40 years. Digital video is less than 10 years old, there are still tens of millions of people out there who are comfortable with watching TV the old fashioned way. They will only change if cable or broadcast TV were to disappear.
- Today’s broadcast TV is simply dreadful. In many markets all that is on broadcast TV in the daytime is reality show dreck such as Doctor Phil, infomercials and Spanish language programming. The movies and reruns that were on in some markets are long gone. At night; CBS’s (NYSE: CBS) boring and formulistic line up is the best advertisement for cable around. For people who want something else; anything else, cable is still the best option.
- Many people are using cable to access the internet. In most American cities the phone and cable companies are the only internet options in town. Google Fiber from Alphabet (NASDAQ: GOOG) is only available in nine US cities. If you don’t live in one of them of you’re stuck with cable, the phone company, satellite or WiFi. That means a lot of people who are streaming Daredevil and The Walking Dead are still sending Comcast a payment every month.
- There is a great deal of programming that is easiest to access through cable. This includes popular series like The Walking Dead and many sporting events including some NASCAR races, Formula One Races, some NFL games, some NBA games, the NHL and the Premiere League soccer.
Is Comcast a Value Investment?
Naturally a lot of people; such as me, will smell value investment here. Comcast certainly looks like a classic value and contrarian play.
It’s making a lot of money, its revenues are growing, it has a lot of float and it is in an industry that a lot of people have written off for dead. Yet is Comcast a value investment?
I would say yes because it is cheap Comcast shares were trading at $37.64 each on March 17, 2017. Even though it paid no dividend; according to ycharts, Comcast did reward investors with a return on equity of 16.38% on December 31, 2016.
Comcast shows why investors should always treat conventional wisdom with profound skepticism. Such thinking is often wrong, and based on emotion, opinion or hunches rather than data.
The data shows that cable operators are definitely a value investment right now and should remain so for the foreseeable future. It also demonstrates that ignoring conventional wisdom and researching the facts is the first step on the road to success as a value investor.