We initiate coverage for Comcast Corp. (CMCSA) with a Neutral recommendation. Comcast, the largest cable MSO in the U.S. is all set to become a media powerhouse armed with a unique control over both content and distribution. The company will purchase 51% stake of NBC Universal from General Electric Co. (GE) for a total consideration of approximately $13.75 billion.
As of Sep 30, 2009, the company’s cable systems served approximately 23.8 million video customers, 15.7 million high-speed Internet customers and 7.4 million phone customers and passed over 51 million homes in 39 states and the District of Columbia. This represents 25% of the total market. Comcast is aggressively deploying the DOCSIS 3.0 (also called Wideband) technology to upgrade its existing customers to high-speed network.
Management predicted that 80% of its residential networks (around 40 million homes and businesses) will be upgraded to DOCSIS 3.0 by the end of 2009 and the rest by mid 2010. With DOCSIS 3.0, the company is now able to offer one of the fastest Internet speeds available in the market. Comcast also started offering next-generation (4G) super fast WiMAX services in the U.S. supported by Clearwire Corp’s (CLWR) nationwide WiMAX networks.
Management has taken decisions to upgrade the whole network with DOCSIS 3.0, offering WiMAX services, rolling-out video-on-demand service, and giving increasing focus on mid-sized enterprises. According to our assessment, effective implementation of all these strategies will pave the way for the company’s long-run growth. However, we also believe that the current valuation reflects the positives, leaving little room for above market gain.
Despite being the largest cable MSO of the U.S., Comcast is facing severe competition from both telecom and satellite service providers that started offering subscription TV services. Apart from the threat of telecom operators, intra-industry competition among cable MSOs has also increased.
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