Updated 4-March-2009
NASDAQ: CMCSA
Comcast Corporation
Investment Thesis
Analyst: Joshua Bernath
Fisher College of Business
The Ohio State University
Columbus, OH
Comcast Corporation is the largest cable operator, multichannel video and
residential high-speed data provider in the United States with over 24 million
video subscribers and 14 million high-speed data subscribers. Although
Comcast will feel the pinch of weakening consumer demand, I believe cable’s
business model to be defensive in nature, as its core products are must-haves
in the minds of consumers and the subscription nature of its revenue streams
are largely recurring. In turn, this leads to less volatility in revenues and cash
flows during an economic downturn. Comcast is led by a strong management
team that has a track record of operational improvements and increasing
returns on assets and equity. I believe Comcast is in the best competitive
position among its cable, satellite and telecom peers, and I anticipate aboveaverage returns for the stock over the next twelve months.
Contact: (419) 551-8321
Bernath.7@osu.edu
Fund: OSU SIM Class (BUS-FIN 724)
Fund Manager: Chris Henneforth, CFA
Recommendation: BUY
Summary
I have assigned Comcast a one-year share price target of $19.97. This
valuation is predicated on the following assumptions:
General economic concerns persist into the second half of 2009.
Competition from telecom providers will remain formidable, however only
one-third of Comcast’s footprint will overlap with Verizon’s FiOS and AT&T’s
U-Verse by year-end 2009.
Gross margin expands over time as revenue mix shifts towards higher
margin data and voice products.
Declining capital expenditures and sustainable free cash flow growth of
approximately 20 percent through 2010.
Annual dividend increases continue and the current share repurchase
program is completed by 2010.
Continued and aggressive targeting of small and medium-sized businesses
within its footprint.
No major plant upgrades in the next five years.
Two standard valuation methods (Discounted Cash Flow and Comparable
Multiples) support this valuation and suggest the intrinsic value of this stock
is approximately 40 to 70 percent above its current price.
Current Share Price: $12.50
Target Share Price: $19.97
Sector: Consumer Discretionary
Industry: Cable & Satellite TV
Revenue Breakdown (12/08A)
Corporate &
Other
1%
Programming
4%
Cable
95%
Share Price Performance
Financial and Valuation Metrics
$30.00
Year
$27.50
$25.00
$22.50
12/08A
12/09E
EPS (Diluted, US$)
0.86
1.07
1.16
P/E (x)
14.5
11.7
10.8
Revenue (US$ m)
34,256.0
35,376.0
36,996.0
EBITDA (US$ m)
13,132.0
13,874.0
14,539.0
2,547.0
2,997.0
3,163.0
1.11
1.42
1.75
Net Income (US$, m)
FCF/Share (Diluted, US$)
$20.00
Number of Shares (Diluted, m)
$17.50
BV/Share (Current, US$)
Net Debt (Current, US$ m)
$15.00
Dividend Yield (%)
$12.50
Market Cap (US$, m)
52-Week Range (US$)
$10.00
Feb-04
Nov-04
CMCSA
Jul-05
Apr-06
Jan-07
Consumer Discretionary Indexed
Sep-07
Jun-08
Feb-09
YTD Return (%)
Beta
S&P 500 Indexed
1
12/10E
2,952.0
14.0
31,261.0
2.16
36,900.0
11.90 - 22.86
(28.91)
0.96
Table of Contents
Investment Thesis
1
Summary
1
Company Overview
3
Business Overview
4
Video
4
Data
5
Voice
5
6
Macroeconomic Analysis
Drivers
6
Outlook
7
Industry Analysis
8
Current Life Cycle
8
Historical & Recent Performance
8
Recent Trends
9
Competition
10
Pricing
11
Regulatory Environment
11
Investment Thesis
11
Valuation
12
Company Analysis
13
Competitive Advantages
13
Financial Statements Analysis
13
Equity Valuation: Multiples
15
Equity Valuation: Discounted Cash Flow
17
20
Summary
Strengths and Opportunities
20
Risks and Concerns
20
Conclusions
21
Appendix 1 Comcast Financial Statements from Company 10-k
23
Appendix 2 Comcast Discounted Cash Flow Model: Base Case Scenario
26
Appendix 3 Comcast Discounted Cash Flow Model: Plant Upgrade Scenario
27
2
Company Overview1
Headquartered in Philadelphia, Pennsylvania, and founded in 1963, Comcast Corporation (Comcast, the
Company) operates as the largest cable operator in the United States and offers a variety of entertainment
and communications products and services. Its cable system passes approximately 50.6 million homes in 39
states and reaches to 24.2 million video subscribers, 14.9 million high-speed Internet subscribers, and 6.5
million phone subscribers.
Its business is classified in two segments: Cable and Programming. The Cable segment, which generates
approximately 95 percent of consolidated revenues, manages and operates cable systems, including video,
high-speed Internet and phone services, as well as its regional sports and news networks. The Programming
segment consists of its consolidated national programming networks, including E!, The Golf Channel,
VERSUS, G4, and Style.
Comcast’s other business interests include Comcast Spectator and Comcast Interactive Media. Comcast
Spectator owns the Philadelphia Flyers NHL hockey team, the Philadelphia 76ers NBA basketball team, and
two multipurpose arenas in Philadelphia, and manages other facilities for sporting events, concerts, and other
events. Comcast Interactive Media develops and operates Internet businesses that focus on entertainment,
information, and communication, including Comcast.net, Fancast, thePlatform, and Fandango. Comcast
Interactive Media, Comcast Spectator and all other consolidated businesses not included in the Cable or
Programming segment are included in “Corporate and Other” activities.
Comcast has grown substantially over the last eight years through a number of transactions, the two largest
of which were the (1) AT&T broadband acquisition, which closed in 2002, and (2) the three-way Adelphia
acquisition, which closed in 2006 and included Adelphia, Time Warner Cable, and Comcast. In 2001,
Comcast had approximately 8.5 million video subscribers. By the end of 2008, this figure had grown to over
24 million. Brian Roberts, chairman and C.E.O. of Comcast, and the son of Comcast’s founder, Ralph
Roberts, has an approximate 33 percent voting interest in the Company.
Figure 1. Comcast’s National Footprint2
1
2
2008 Comcast Corporation 10-k, Hoover’s
Company Reports
3
Business Overview
It is important to understand the industry and business constituents for the sake of this report and the analysis
it includes. The competitive landscape has undergone some recent changes which will be explained later in
the report. Below is a list of Comcast’s major competitors and their respective business category:
Multi-System Operators (MSO) — Companies that operate multiple cable systems, usually across
several markets. MSOs and cable companies are used interchangeably in this report. Companies include:
Comcast, Time Warner Cable, Cablevision.
Direct Broadcast Satellite (DBS) — Companies that provide video service by means of satellites.
Companies include: DirecTV, DISH Network.
Regional Bell Operating Company (RBOC) — These companies originally provided telephone services.
Because of overlapping technologies, they have moved into video and data. RBOCs and telecom
companies are used interchangeably in this report. Companies include: Verizon, AT&T. Verizon’s service
is FiOS and AT&T’s service is marketed as U-Verse.
MSOs such as Comcast and Time Warner Cable generally offer the same services, with the majority of
revenue coming from video, data, and voice. More often that not, video, data, and voice are bundled together
providing the consumer with a package or bundle of services from one source. In the following section, I
provide an overview of the products and services these companies provide:
Video
Basic Cable — This is the current standard cable offering consisting of a small or large package of analog
channels. This is the basis for most of the cable industry’s business, as the MSOs sell data and voice
primarily to this customer base.3 Cable companies are currently transitioning most of their customers to digital
and away from analog based channels in accordance with government regulation and for bandwidth
expansion.
Digital Cable — Customers wishing to upgrade service have the option of receiving channels in digital
format. I believe digital penetration is central to customer retention, as it offers the ability for MSOs to up-sell
customers with interactive services, such as Video on Demand (VOD), which DBS competitors cannot fully
replicate, as well as high-definition (HD) and digital-video recording (DVR) capabilities.
Video on Demand (VOD) — This is one of the most compelling products offered by the MSOs and is one of
the biggest differentiators relative to the DBS providers. Currently, the MSOs typically offer over several
thousand programs per month and over several hundred hours
Figure 2. Comcast’s Cable Segment
of high-definition VOD programming.
Revenue Breakdown by Product
Category
Subscription Video on Demand — This service provides
customers with access to on demand content from subscription
Franchise Fees
Other
3%
video services.
4%
Advertising
5%
High-Definition Television — Television signals are broadcast
in high-definition. Comcast charges customers an additional
monthly fee to receive HD programming with essentially no
incremental cost.
Phone
8%
High-Speed
Internet
22%
3
Video
58%
Digital Video Recorder (DVR) — This service allows customers
to record programs and watch them at a later date or time. DVRs
are rented to the customer for monthly fees of $7 to $15.
Overall, approximately 30 percent of Comcast’s and Time
Warner Cable’s customers take an HD/DVR box.
In the U.S., television stations are scheduled to change over to digital on 12-June-2009. This was previously scheduled for 17-February-2009.
4
Premium Channel Programming — Video customers have the option to pay additional monthly fees for
premium channels, which generally include HBO, Cinemax, STARZ, and Showtime.
Pay-Per-View Programming — This programming primarily includes sports and music events broadcast live
to customers for a one-time fee. These features are only available to digital customers, increasing the
attractiveness of taking a digital package and driving higher revenue.
Data
High-Speed Internet Service — This is broadband Internet access via cable, with downstream speeds
generally from 6 Mbps up to 16 Mbps. Comcast is currently introducing DOCSIS 3.0, which will increase
speeds to 100+ Mbps. I believe this will keep them competitive with Verizon’s FiOS broadband service (the
highest speeds to date) and generally ahead of consumer demand. Over time, cable’s ability to handle more
bandwidth intensive applications should drive application development to utilize the additional capacity and
spur additional demand for the higher tiered and more expensive broadband options.
In order to capitalize on demand for lower speed Internet service, some MSOs are offering users a lower
priced economy tier of broadband service at 768 Kbps, which is more competitive with the DSL offering from
Verizon and AT&T. My view is that this new option is an attempt to prevent customers from disconnecting
completely in a tough economic environment and will provide customers with an alternative to more cheaply
priced DSL and dial-up Internet services.
Voice
Phone service — The MSOs are employing an Internet Protocol based voice product, which includes local,
long distance, and a variety of calling features such as caller ID, call waiting, and voicemail. The calls are
routed over a private network and do not use the public Internet, which results in higher quality.
Figure 3. Comcast’s Product Penetration4
80.0%
CAGR:
15.6%
70.0%
60.0%
CAGR:
(3.0)%
50.0%
40.0%
CAGR:
13.7%
30.0%
20.0%
CAGR:
3.3%
10.0%
0.0%
2004
2005
Video
2006
Digital Video
2007
High-Speed Data
4
2008
Phone
Penetration is calculated by dividing the number of customers by the number of homes passed. The number of customers includes the Company’s small
and medium-sized business customers.
5
Macroeconomic Analysis
Comcast and the Cable and Satellite TV industry as a whole have run into the macroeconomic headwinds
facing many of the companies in the country. I believe the higher-priced bundle packages represent a growing
portion of consumers’ income, and with a weakening economy, these consumers are less likely to migrate to
higher tiers and also more likely to trim down features or services when their household budgets come under
pressure. Ultimately, I believe video is one of the last items to go after power and cell phone. Considering that
if one cannot afford to eat out or go out for entertainment, then one has to stay at home, making television an
attractive option for entertainment, in my opinion. Therefore, consumers may not be upgrading services, but
they are still watching television and paying the cable, broadband, and phone bill.
Drivers
A comprehensive regression analysis revealed three macroeconomic factors driving Comcast’s valuation with
a meaningful level of statistical significance: Existing Home Sales, the Unemployment Rate, and Disposable
Personal Income. The multiple regression analysis, with Comcast’s Enterprise Value-to-Sales ratio as the
dependent variable, and the three aforementioned independent variables yields an R-Square of 0.8005.
Therefore, this particular model explains 80 percent of the variation in Comcast’s valuation. Furthermore, the
model passes the F-test for predictive validity, as evidenced by the low p-value. Each of the individual
predictors are also effective, which is shown through the low p-values from the T-Statistic test.
Within the model, Existing Home Sales are positively correlated with Comcast’s valuation. Intuitively, this
makes sense because high levels of existing home sales and new home sales helps cable operators increase
penetration. Every time a new resident moves into a home (existing or new), one of his/her first tasks is to
order telecommunications services (e.g. video, data, and voice). If, and when, a new resident contacts a cable
operator to order television service, that MSO is given the opportunity to market its other services such as
high-speed Internet and phone at a critical decision making point. As new home sales slow, and turnover in
existing homes slows, point of sale contact with customers declines, and the opportunity to sell cable services
becomes more limited, hence the strong positive correlation.
The Unemployment Rate has a strong negative correlation with the dependent variable. This too, seems
logical, as does the positive correlation with Disposable Personal Income because a consumer with declining
disposable income is less likely to purchase advanced cable or broadband services.
Figure 4. Regression of Comcast’s Enterprise Value/Sales Ratio and Economic Factors
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.8947
0.8005
0.7981
0.3791
262
ANOVA
df
Regression
Residual
Total
Intercept
Existing Home Sales (Mil)
Unemploy. Rate (YTY % Chg.)
Disp. Personal Income (YTY % Chg.)
SS
148.7391
37.0795
185.8186
MS
49.5797
0.1437
Coefficients Standard Error
0.4656
0.3355
0.5207
0.0500
-0.0202
0.0029
0.0546
0.0165
t Stat
1.3878
10.4101
-6.9865
3.3071
3
258
261
6
F
Significance F
344.9765
0.0000
P-value
0.1664
0.0000
0.0000
0.0011
Lower 95% Upper 95%
-0.1951
1.1263
0.4222
0.6192
-0.0259
-0.0145
0.0221
0.0871
Outlook
My outlook for the general economy over the next twelve months is bleak. Perhaps the sole bright spot in the
past several months for consumers has been a sharp retreat in oil prices to below $40 a barrel (versus a
$148/barrel peak in July 2008), which should help ease consumers’ outlays for gasoline and home energy. A
number of Cable and Satellite TV providers have recently cited the slowdown in the economy as having an
impact on subscriber growth and advanced service purchases (HD, VOD, DVR, Pay-per-view).5 However,
history has shown that share prices will likely bottom before the economic fundamentals start to improve, this
bodes well for stocks. Since 1949, bear markets have bottomed a median of five months before recessions
have ended, and eight months before corporate earnings have troughed.6 While this bodes well for stocks, it
also implies that the economic fundamentals will be depressing for some time in the future.
With respect to the predictors in the model, Existing Home Sales are currently at their lowest levels in nearly
twelve years. The most recent decline was 5.3 percent in January and I am expecting the number of units
sold to decline into the second half of 2009, before picking up at the end of this year.7 Housing prices are
returning to reasonable or normal levels, however they most likely have to become subnormal for a period to
eliminate the excess supply. Therefore, over the next six months I expect this predictor to keep downward
pressure on valuation multiples. I expect that in the fourth quarter of 2009 housing prices will get to extremely
attractive levels and consumers will jump on bargains, in turn helping cable companies get in front of potential
customers once again.
The Unemployment Rate currently stands at a 16-year high of 7.6 percent. The Federal Reserve projects that
the Unemployment Rate could climb as high as 8.8 percent by the end of this year.8 The negative correlation
this variable has with the model and the dismal figures that likely lie ahead will be forcing multiples to maintain
their current low levels. There is certainly no way to spin this positively for Comcast or the Cable and Satellite
TV industry, however I do not feel this will push valuations lower because I believe the higher unemployment
expectations are already priced in to equity valuations.
Lastly, Disposable Personal Income increased in January by 1.7 percent after declining 0.2 percent in
December.9 Low gasoline prices may be leaving some more cash in consumers pockets, however this excess
cash may be saved rather than being spent on goods and services. I expect Disposable Personal Income to
stay flat for the rest of 2009, before picking up momentum in 2010.
There are two things I would like to make a note of regarding these economic predictions—(1) these
expectations are most likely priced in to equity valuations, therefore valuation levels may not depress further,
but rather stay at low levels until there is a string of promising economic news; (2) the reduction in housing
growth and turnover does have a silver lining for cable companies. When housing growth slows, cable line
extension slows, and in turn, line extension capital expenditures are reduced and free cash flow increases.
Even more, slowing housing growth and turnover reduces the churn associated with subscribers changing
residences. Churn is the monthly customer disconnect rate. When move churn wanes, cable companies see
decreasing costs from fewer trucks going out for maintenance and labor installation costs also decline.
With that said, I like the Comcast story within the context of a weakening economy. Although Comcast will
feel some of the pinch in declining consumer demand, I believe cable’s business model produces stable and
recurring revenues because of its ingrained position in the lifestyle of many consumers. Also, if stock prices
bottom before the economy rebounds as history has shown, I think investors will be looking for investments
with solid long-term investment characteristics, which will mean growth. I believe cable will maintain a better
near and longer-term growth outlook than telecom, thus attracting additional capital as investors flow back in
to the market.
5
Comcast Corporation and Time Warner Cable, Inc. Q4 2008 Earnings Conference Call
Standard and Poor’s Industry Surveys: Trends and Predictions, February 2009
Bater, Jeff and Brian Blackstone. “Continuing Jobless Claims Top 5 Million: New-Home Sales, Durable-Goods Orders Drop.” The Wall Street Journal OnLine Edition. 26-February-2009.
8
Bater, Jeff and Brian Blackstone. “Continuing Jobless Claims Top 5 Million: New-Home Sales, Durable-Goods Orders Drop.” The Wall Street Journal OnLine Edition. 26-February-2009.
9
Evans, Kelly. “Shoppers’ New Frugality Hurts Business.” The Wall Street Journal On-Line Edition. 3-March-2009.
6
7
7
Industry Analysis
Comcast is part of the Cable and Satellite TV industry within the Consumer Discretionary sector. Over the
past several years, the previously distinct cable and telecommunication industries have moved closer
together as they begin to cross over into each other’s core competencies. The reasons for this are many, but
the main drivers appear to be technological advancement and the need for continued growth. I believe over
the next several years, the two industries will begin to converge and look more and more alike.
Current Life Cycle
I believe the Cable and Satellite TV industry has moved from a mature to a growth phase of its life cycle and
will continue to grow over my forecasting horizon, largely due to technological changes. The mature to growth
transition is highlighted by the fact that basic or analog cable services are being replaced by all-digital
platforms that will open up a significant amount of bandwidth previously tied up in the analog based system.
In turn, this unlocked bandwidth will provide the capabilities for faster Internet, advanced viewing options,
such as high-definition channels, video-on-demand, and digital-video-recording, as well as more interactive
applications. This transition has been taking place since the late-1990s when industry participants placed
significant investments in a hybrid cable plant flexible enough to support multiple systems, such as video,
data, and voice.10 I believe the industry will have an array of new growth opportunities present themselves as
the transition to all-digital progresses.
Historical & Recent Performance
Figure 5 illustrates the price performance of the Cable and Satellite TV industry against the Consumer
Discretionary sector and the overall market over a ten-year period. The industry’s beta is 1.19 versus 1.13 for
the Consumer Discretionary sector, implying that the industry is more volatile that both the market (β=1) and
its sector. The industry surged during the technology boom and then again from 2003-2007. Because of the
exorbitant price levels reached in 1999 and 2000, I limited my valuation analyses of the industry and Comcast
to encompass only the past five years.
A detailed analysis of the Cable and Satellite TV industry income statement reveals that total industry revenue
has grown at a compound annual growth rate (CAGR) of 23.5 percent since 2002. The top-line was driven by
economic expansion, as well as the addition of high-speed data and voice into the industry’s product mix.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) grew at an even more impressive
55.9 percent compound annual rate during the same period. EBITDA can be used as a cash flow proxy for
Figure 5. Ten-Year Price Performance: Cable & Satellite vs. Consumer Discretionary vs. S&P 500
$55.00
$50.00
Cable & Satellite
Consumer Discretionary
S&P 500
$45.00
YTD
(14.9)%
(20.2)%
(20.7)%
1-Year
(38.1)%
(43.1)%
(43.7)%
5-Year
(3.5)%
(7.4)%
(5.0)%
10-Year
12.8%
(3.0)%
(1.3)%
$40.00
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
Feb-99
Feb-00
Feb-01
Feb-02
Cable & Satellite
Feb-03
Feb-04
Feb-05
Consumer Discretionary Indexed
10
Feb-06
Feb-07
S&P 500 Indexed
Amobi, Tuna M. and Erik B. Kolb. Standard & Poor’s Industry Surveys: Broadcasting, Cable & Satellite. 5-February-2009
Note: 10-Year and 5-Year returns in Figure 5 are average annual returns for each respective time period.
8
Feb-08
Feb-09
any company so long as the figure is positive; it is particularly relevant for Cable and Satellite companies
because they have large amounts of depreciation due to the capital intensive nature of the business.
Depreciation and amortization are non-cash expenses, therefore they are added back to operating income.
EBITDA can be used to assess a company’s profitability and their ability to generate cash flow that excludes
the impact of financing decisions. Gross margins stood at 45 percent in 2002, and they have since grown to
51 percent. Furthermore, earnings-per-share for the industry has grown at a 27 percent CAGR since 2003.
In 2008, Cable and Satellite TV companies’ profitability came under pressure due to fewer than expected
subscriber additions and fewer customers purchasing advanced entertainment options. However, both
Comcast and Time Warner Cable stated in their 4Q 2008 earnings calls that they are seeing the phones ring
more in the first quarter of 2009 than they were in October and November of 2008, which is a positive nearterm outlook for the industry. Comcast also stated that they are not seeing large numbers of people dropping
their television service due to either financial hardship or the fact that they can get video increasingly over the
Internet.
Total Revenue
Lastly, the subscription nature of these business models lends more predictability to the revenue stream for
cable and satellite operators, which is highlighted in a tough economic environment. For example,
subscription revenues accounted for
greater than 90 percent of total revenues
Figure 6. Subscription and Advertising Revenue as a %
of Total Revenue, 2008
in 2008 for Comcast, Time Warner Cable,
DirecTV, DISH Network, and Cablevision,
5%
4%
3%
~2%
<1%
100%
as seen in Figure 6. Advertising revenues
80%
are highly correlated (r=.99) with the
economy and business spending, which
60%
96%
97%
98%
99%
95%
are both currently under pressure.
40%
However, as Figure 6 shows, most cable
20%
companies are insulated from these
economic headwinds by a large
0%
subscriber base and steady stream of
Time Warner
Comcast
DirecTV
Cablevision
DISH Network
Cable
cash flows.
Advertising Revenue
Subscription Revenue
Recent Trends
There has been a growing acceptance by consumers for bundled services. Bundles typically include: video,
data, and local and long distance phone. Over the last few years, MSOs only had the ability to offer the tripleplay bundle (video, broadband, voice) on a wide-scale basis and they still have a near-term advantage over
their competitors. However, Verizon and AT&T have developed video offerings that are of equivalent quality
to the MSOs and have already begun deploying the video service to a portion of their footprint. Over the next
four years, Verizon and AT&T, are slated to roll out video service to the remainder of their footprint. This is a
“game changer” for the industry, as the RBOCs now have the capability to compete with the bundled offerings
from the MSOs. DBS providers cannot currently offer voice or broadband and therefore, may be at a
structural disadvantage over the long term. New technologies, such as VOD, DVRs, and HD are also
becoming increasingly popular as customers transition to the all-digital platform from analog. My view is that
new technologies and advanced feature functionality are unlikely to differentiate video offerings over the long
term. This impact is neutral for all parties, as they can only offer a provider a competitive advantage versus its
rivals over the short to intermediate term. However, in the near term, Comcast clearly has an advantage
because it can provide the triple-play offering on a much wider scale than any one of its competitors.
9
With respect to trends in broadband, growth slowed down in 2008 compared to 2007. In 2007 the broadband
category grew by nine million subscribers, however in 2008 it grew by 7.5 million, a 20 percent decline.11
Despite the slowdown, I continue to see sustainable growth in broadband for cable operators. Figure 7
illustrates my forecast (through 2013) for U.S.
Figure 7. Broadband Household Forecast, 2008E—
broadband subscribers. In addition to growth in
2013E12
overall households with a personal computer,
new sources of customer growth include an
(in 000s)
2008E
2013E
US Households
115,000
122,500
estimated base of 12 million current dial-up
x PC Penetration of US HHs
79%
82%
homes, which should convert to broadband
90,850
100,450
= Total PC HHs
over time. Cable has also had success winning
x Internet Penetration of PC HHs
91%
95%
over DSL customers from the RBOCs, and
82,674
95,428
= Internet HHs
given that DSL holds roughly 45 percent of the
- Dial-Up HHs
12000
5000
broadband market, this is potentially a large
= Broadband HHs
70,674
90,428
/ US HHs
115,000
122,500
source of additions for cable. I conservatively
= Broadband Penetration of US HHs
61%
74%
presume that cable will capture approximately
50 percent of the incremental 20 million
broadband households that I estimate over the next five years. This is a substantial amount of new broadband
subscribers converting to cable and will be a key factor in driving future earnings for the MSOs, such as
Comcast and Time Warner Cable.
Competition
Competition in the Cable and Satellite TV industry is high because the products being sold are minimally
differentiated. Also, due to advancements in technology and government regulation, barriers to entry have
declined. I have identified three factors—technology, telecomvergence, and regulations—that are driving
increased competition in the video distribution and telecommunications business.
Technology — Advancements in technology are constantly occurring, which opens up doors for
competitors to find new ways of distributing content. The emergence of broadband and the Internet is one
example of an increasingly viable method to distribute video content.
Telecomvergence — Cable and telecom have enjoyed separate markets historically, now competitive
openings are being exploited by each player, and the overlap has become quite extensive. Over time, I
see these two providers in what is, and what will remain, a difficult industry to support multiple networks.
Regulations — Historically, regulators have been concerned about cable’s monopoly in the video
business. I believe regulators are simply interested in increasing competition to provide consumers with
more choices and lower prices.
Figure 8. Three Factors Continue to Increase Competition
3 Forces
Reasons
Technology
Digital compression is
increasing bandwith.
Broadband makes internet
another viable video distribution
medium.
Telecomvergence
Telcos are attacking video,
cable companies are attacking
data and voice. The residential
market has been the first area
of convergence.
Regulations
Regulators are interested in
more competition to provide
customers with greater choice
and lower prices.
11
End Result
Increased
Competition
IBISWorld U.S. Cable, Internet and Telephone Providers Report dated 19-February-2009
Figures for broadband penetration forecast came from U.S. Census Bureau and the IBISWorld U.S. Cable, Internet and Telephone Providers Report dated
19-February-2009.
12
10
Pricing
Across all three product categories (Video, Data, and Phone), I consider price to be the top factor affecting
demand. I feel that consumers view communication services as fairly “commodity-like,” and that as
competition increases, pricing power may diminish.
With that said, in the near-term, I am expecting the pricing environment to remain generally rational, even with
more competition. My view is based on three factors:
Oligopoly/duopoly structure — First, the pay video, broadband, and voice markets are still dominated
by two to four major players in each market. As a result, I think it is in the best interest of all parties to
maintain rational pricing. Similar to the prisoner’s dilemma scenario, where it is in the best interest of all
parties to do nothing.
Cutting prices will be difficult — I have determined that the current capital expenditures and operating
expenses required to deliver video by the RBOCs are high. If they are to achieve a reasonable rate of
return on their investments, it will be difficult for them to substantially cut prices on their video offerings.
Recent price adjustments — The most recent price adjustments by both MSOs and RBOCs have been
in unison, with the MSOs achieving an immediate-term advantage due to the attractive pricing per offering
that arises from bundled packages.
Regulatory Environment
The Cable and Satellite TV industry is tightly regulated by the Federal Communications Commission (FCC),
and is subject to federal, state, and local regulation. The Communications Act and the FCC govern cable
operators’ video subscriber rates, ownership, carriage of broadcast programming, programming packages,
channel access by local franchises, utility pole and conduit usage, phone service, and broadband service.
I have pinpointed two pending regulations that, if enacted, could alter the telecommunications playing field:
Ownership Limits — The FCC recently ruled that MSOs are limited to 30 percent national household
ownership, if upheld, this could reduce the industry’s ability to grow through acquisitions, which it has
successfully done in the past. A similar 30 percent rule was struck down in Federal court in 2001, and
from industry reports, it is likely this too, will be struck down. This ruling is strictly for residential services, I
do not believe it will impact potential M&A from acquiring small-medium enterprise related operations.
Pricing, a la carte — The MSOs are limited in the price they can charge customers for limited basic
cable, equipment, installation, and packages combining premium services with other tiers of service in
areas where it is not subject to competition. Members of the FCC have attempted to institute a la carte
pricing, which would give consumers the ability to order only desired channels, or packages of channels,
rather than from the current cable package menu. Some members of the FCC believe this would result in
lower cable bills for customers. Although, the total impact of this regulation is unknown, it could potentially
lower video service revenues for the MSOs.
Investment Thesis
The cable industry possesses significant growth opportunities as it merges into the telecommunications world
of voice and enterprise-related services. The industry has a robust plant for delivering video, voice, and data
to residential customers, and it is adapting that network for alternative uses such as small-medium sized
businesses. I believe the cable companies have an inherent advantage over the RBOCs and DBS providers
for several reasons.
First, I believe video is the stickier service and is a more personal sale, making it more difficult for the RBOCs
to win back bundled business such as voice and data. This gives the MSOs an advantage because they have
had success wrestling voice and data consumers from the RBOCs in the past. Now, those consumers that
have the “whole” package from the MSOs will be hesitant to switch to the new bundled offering from the
11
RBOCs. Furthermore, the MSOs can offer consumers their bundled packages across their entire footprint,
whereas the RBOCs are in the early stages of rolling out their respective packages. I also believe video is one
of the highest priorities for consumers when they purchase or relocate to a new house or apartment, giving a
natural advantage to the cable companies in selling video, data, and voice all at once because DBS providers
are incapable of providing data and voice, and the RBOCs do not have as extensive of a footprint.
Second, cable’s ability to drive broadband additions over the last two years has been impressive. Comcast
grew broadband penetration by 13 percent and 8 percent, respectively in 2007 and 2008. Furthermore,
Comcast grew phone penetration by 42 percent in 2007 and 29 percent in 2008. The broadband and phone
penetration levels are coming to the MSOs even when the competing RBOC phone and DSL products are
heavily discounted. On its full year 2008 conference call, Comcast noted that 66 percent of its HSD net
additions in the 2008 were DSL subscribers switching over to cable HSD versus 44 percent of net additions
two years ago. Furthermore, the introduction of higher-speed offerings, specifically through DOCSIS 3.0, will
drive incremental market share for MSOs over the next five years.
Third, I believe MSOs are on the first few years of a ramp to taking small-medium enterprise (SME)
customers from the RBOCs. Comcast, for example, noted this expansion in their 4th Quarter and Full Year
2008 earnings call. The MSOs do not have the plant to provide telecommunication services to sophisticated
customers at this point, but there is ample “low-hanging fruit” that can be captured in the current marketplace.
I feel this market represents the biggest growth opportunity for the MSOs.
This investment thesis lays out the reasons I prefer cable over the RBOCs and DBS providers in the Cable
and Satellite TV industry. This is largely driven by the fact that consumers indicate a preference for bundling
and cable has the only platform capable of providing the desirable triple-play bundle on a wide-scale basis.
The thesis is also supported by the MSOs recent success in obtaining small-medium enterprise customers
away from the RBOCs.
Valuation
In 2008, the industry performed better than the market, with a 28 percent decline versus a 39 percent decline
for the S&P 500, which is counter to the industry’s beta of 1.19. I feel the 11 percent “outperformance” is
attributed to the defensive characteristics of the industry. With respect to the valuation techniques, I
performed comparative multiple valuation analyses on the Cable and Satellite TV industry using a five-year
time horizon. On an absolute basis, Cable and Satellite TV is, not surprisingly, well below the five-year means
for all of the valuation metrics. Every valuation metric is currently trading near or at its five-year low on an
absolute basis.
Figure 9. Five-Year Historical Cable & Satellite TV Comparative Multiple Analysis
Absolute Valuation
P/Forward E
P/Adjusted Cash Flow
P/Sales
High
86.60
19.20
3.09
Low
11.00
4.00
0.85
Mean
23.10
11.40
2.15
Current
11.00
4.10
0.85
Percent from
Mean
(52.4)%
(64.0)%
(60.5)%
Valuation
Opinion
Low
Low
Low
Current
0.94
0.60
1.27
Percent from
Mean
(34.7)%
(38.1)%
(11.2)%
Valuation
Opinion
Low
Low
In-Line
Percent from
Mean
(65.8)%
(38.2)%
(11.2)%
Valuation
Opinion
Low
Low
In-Line
Relative to S&P 500
P/Forward E
P/Adjusted Cash Flow
P/Sales
High
4.77
1.54
1.86
Low
0.76
0.55
1.03
Mean
1.44
0.97
1.43
Relative to Consumer Discretionary
P/Forward E
P/Adjusted Cash Flow
P/Sales
High
4.53
1.88
3.01
Low
0.34
0.63
1.80
Mean
1.20
1.10
2.24
12
Current
0.41
0.68
1.99
Referring back to Figure 9, the current Price-to-Year Forward Earnings and Price-to-Adjusted Cash Flow for
the industry relative to the Consumer Discretionary sector are well below 1, indicating they are trading below
the sector. One would think this particular industry would be one of the few shelters among Consumer
Discretionary stocks during a recession because of cable, Internet, and phone’s important positions in the
every day lives of consumers. I view this is as an oversold signal for the Cable and Satellite TV industry. The
comparative analysis confirms my opinion that there is considerable upside for the industry, and more
specifically, the cable MSOs, over the next twelve months.
Company Analysis
Competitive Advantages
The Cable and Satellite TV industry is highly competitive. Competitive advantages are not static due to
advancements in technology and government regulation fueling new product offerings and waves of
competition. I have identified four competitive advantages for Comcast within the current environment:
Infrastructure Size and Location — Comcast has built and acquired the largest hybrid fiber-coaxial
network that passes over 50 million U.S. households (see Figure 1) and is flexible enough to support
video, data, and voice. Economies of scale count for something in this business. Once a base plant has
been laid and the associated capital expenditures are incurred, subscription revenues are generated and
free cash flow increases commensurately, which is what Comcast is experiencing.
Technological Position — Comcast is upgrading its network to offer faster speeds and more content to
better compete with the satellite and phone companies. A major network initiative is the migration to
DOCSIS 3.0, which will significantly increase bandwidth for high-speed data. Customers will have the
possibility of download speeds in excess of 100 Mbps. DOCSIS 3.0 should be virtually as strong in terms
of speed and reliability as what FiOS and U-Verse can offer. The Company is also completely
transitioning to digital video and eliminating analog channels in its lineup, which will give Comcast the
ability to (1) Offer essentially an unlimited number of channels, (2) Offer higher-quality HD channels, (3)
Offer more phone lines and higher data speeds, and (4) Offer other applications that have yet to be
developed or deployed.
Phone Service — In my view, phone service lacks the ability to be differentiated in the way that HSD
service can via speed, implying that phone service pricing will remain an important driver for subscriber
retention and growth. The technology Comcast uses to deliver phone service (VoIP), gives it the ability to
continue to discount phone service while maintaining product profitability. Comcast’s phone service gross
margins are in the range of 70-85 percent, well above its competitors. Price wars that lead to major retail
price declines are not good for any competitor, but Comcast can continue to reduce the price of its phone
service over time and maintain solid profitability on its voice product.
High Speed Data Service — I feel HSD is the least commoditized product within the triple-play bundle
because consumers care as much about the speed and reliability of their HSD product as they do about
its price. Comcast’s HSD product is superior to the RBOC’s wide-scale DSL offering in terms of its speed,
and is also viewed as more reliable. As Internet applications become increasingly bandwidth-intensive
(e.g. Website graphics and data, software downloads), and consumers become more dependent on the
Internet for multimedia use, I expect consumers to continue to place a high value on the speed and
reliability of their Internet connection. The DOCSIS 3.0 roll out, which is in progress, will support this
advantage even further.
Financial Statements Analysis
Income Statement
There are two primary factors driving Comcast’s rising earnings: (1) increased high-speed data and voice
penetration and (2) customers switching to all-digital platforms. First, I believe the gross margins for data and
voice are roughly 95 percent, and 70-85 percent, respectively, which is expanding overall margins as
13
Comcast’s revenue mix shifts toward its data and voice services. Second, as customers transition to digital
from analog platforms, they can purchase advanced services, such as video on demand and digital video
recording. Comcast cites that 45 percent of customers take these advanced services, generating average
monthly revenue of $80-$85.
From 2005-2008, free cash flow (FCF) grew at a compound annual growth rate of 22 percent. In an effort to
return this FCF to shareholders, the Company instituted a share buyback program in 2007 and a 25 cent
dividend for 2008. The buyback program has been halted for the time being, while the Company increased
the annual dividend to 27 cents for 2009.
Balance Sheet
The status of a company’s balance sheet is crucial, especially in the midst of these tough economic times.
Comcast has $32.5 billion of debt and $1.2 billion of cash and short-term investments as of the end of 2008.
This capital structure implies the Company is sitting on a 2.8x leverage ratio (Total Assets/Total Shareholder’s
Equity). The industry average is ~4.0x, therefore I believe this gives the Company sufficient flexibility to invest
in new initiatives.
In the fourth quarter of 2008, Comcast used FCF to de-lever as opposed to paying it back to shareholders.
This will likely continue into 2009 as well. Moody’s is considering upgrading their credit rating, citing the
Company’s financial flexibility and strong free cash flow generation, which is a positive for the Company
because in the event it does need to access the capital markets, it will be able to borrow at a lower rate. I
believe the decision to de-lever is driven by the desire to maintain a conservative capital structure, and is not
a signal that the Company is preparing for an acquisition in the near term, for that would require someone
willing to sell cable assets. Someone who does not have to sell at the moment is likely to remain on the
sidelines, given the scarcity of potential buyers.
An alternative to deleveraging would have been to return more capital to shareholders, which clearly would
have been preferable. With that said, I explain the outlook for FCF below and it is undoubtedly bright,
therefore shareholder returns through increased dividends and share buybacks are going to occur sooner
rather than later. The Company’s balance sheet will be in an extremely strong position when the economy
turns around, which I view as a positive catalyst for the stock.
Capital Expenditures & Free Cash Flow
Comcast’s asset base generates relatively predictable and stable cash flows, and the one big variable limiting
the conversion to FCF is capital expenditures. Management has said that capital expenditures will decline
over the next two years. Therefore, I believe Comcast can continue to grow its FCF at approximately 20
percent annually through 2010. Beyond this point, FCF growth should slow, but remain in the 5-10 percent
range per year.
Technological advancements and competition will determine whether Comcast needs to pursue another
major upgrade cycle in 5-10 years. At this point, I feel Comcast has a number of economical bandwidth
expansion options available without incurring huge capital outlays. Nevertheless, in my discounted cash flow
equity valuation I included a scenario where competition heightens to unanticipated levels and a major plant
upgrade is necessary to contend with the incumbents. This will be explained in the Equity Valuation:
Discounted Cash Flow section of this report.
DuPont Analysis
I performed a DuPont analysis over the past five years to illustrate Comcast’s profitability and operational
efficiency over time and relative to the industry (see Figure 10 on page 15).
Profit Margin (EBIT / Total Revenue) measures operational efficiency. When this ratio is positive and rising
over time, as is the case with Comcast, it is a good sign that operating management is going well. Comcast is
producing sales and controlling costs and as a result is earning more per dollar of sales. The margin is also
sitting well above the industry median, implying the Company is better at managing costs than its competitors.
14
Asset Turnover (Total Revenue / Average Total Assets) measures how efficiently a company is using assets
to generate sales, as higher asset turnover implies better asset management. Comcast is showing a rising
asset turnover over time, but is currently below the median of its Cable and Satellite peers. The industry
median is being skewed by the satellite TV providers because they do not have near the asset requirements
that an MSO, such as Comcast or Time Warner Cable does. Satellite providers do not need to build a plant
on the ground across the entire country like the MSOs. They have satellites that cover an enormous area,
therefore their assets are lower, which skews the industry’s asset turnover higher.
Figure 10. DuPont Analysis for Comcast
Profit Margin (EBIT / Total Revenue)
x Total Asset Turnover (Total Revenue / Avg. Total Assets)
2004
14.72%
0.18x
2005
16.71%
0.20x
2006
18.50%
0.23x
2007
18.05%
0.28x
2008
19.65%
0.30x
LTM
Industry Median
4.67%
0.60x
= Return on Investment
x Leverage Multiplier (Avg. Total Assets / Avg. Total Equity)
2.65%
2.57x
3.38%
2.55x
4.32%
2.63x
4.98%
2.71x
5.95%
2.77x
2.80%
3.68x
= Return on Equity
6.81%
8.63%
11.35%
13.52%
16.46%
10.30%
Return on Investment (Profit Margin * Total Asset Turnover) measures the profitability of the assets used by
the firm. This ratio should be rising over time. This ratio is unique because it can compare companies with
different strategies. For example, the same levels of ROI can be achieved by either a high profit margin, low
turnover strategy or by a low profit margin, high turnover strategy. In this case, profit on sales and asset
turnover can be thought of as a strategic tradeoff. Comcast has a low turnover strategy because of the huge
capital investment necessary to generate revenues in the cable industry, but this is offset with well above
average profit margins.
Leverage Multiplier (Average Total Assets / Average Total Equity) is a representation of capital structure. This
ratio typically should not be rising over time because an increase means that more debt is being used to
finance the firm. There is a capital structure trade off associated with debt and equity, debt has a lower cost
than equity, provides an interest tax shield and amplifies return on equity. Equity is a more expensive choice,
but lowers the threat of bankruptcy. Comcast is currently in an enviable position as it is almost a complete
turn below the industry median with respect to this metric. Although this metric is rising over time, as I
mentioned in the Balance Sheet subsection above—Comcast has a conservative capital structure in place,
which is imperative when capital markets are as volatile as they are currently.
Return on Equity (Return on Investment * Leverage Multiplier) is a measure of the profitability of funds
invested by the owners of the firm, and should be as high as possible over time. It is important to discern what
ROE is being driven by. Increasing ROI implies operational improvement whereas increasing leverage
suggests higher debt levels and increased risk. Comcast’s ROE is being driven by increases in both metrics,
but more so by ROI than leverage.
In summary, Comcast ranks above average in Profit Margin, ROI, Leverage Multiplier and ROE, and is also
seeing positive trends over the past five years in most of these metrics. Over time, I am expecting Comcast’s
ROI to increase as capital expenditures wane and as I mentioned earlier, the leverage multiplier will decline in
2009 due to the Company’s deleveraging initiative. In regards to ROE, going forward the increased ROI
should offset any decline in profit margin and/or leverage. Overall, this analysis reveals that Comcast is a
prudent and transparent investment with a track record of improving efficiencies and returns that should yield
sustainable growth over the near and longer term.
Equity Valuation: Multiples
I used several five-year comparative multiple valuation methods to determine the relative value of Comcast. I
used five years of historical data versus ten years because as I mentioned in the Historical and Recent
Performance section, trading levels for the industry hit irrational highs in the early part of this decade. I do not
see the industry returning to these levels over my forecasting horizon. In an effort to discern the
reasonableness of my multiples evaluation, I also examined Comcast’s share price relative to the S&P 500,
Consumer Discretionary sector, and the Cable and Satellite TV industry.
15
Absolute Valuation
Comcast is currently trading at a five-year low on every one of these valuation metrics. Over the past five
years, the Cable and Satellite TV industry has undergone a transformation mainly driven by the convergence
of cable MSOs and the telecommunication RBOCs. This increase in competition combined with the
economy’s bleak outlook for 2009 served as the basis for my decision to revert the target multiples back to 50
percent of the five-year mean. The fair value this analysis reported for Comcast was $18.95 per share, or 51
percent above the current $12.50 share price.
Figure 11. CMCSA Absolute Valuation
P/Forward E
P/Adjusted Cash Flow
P/Sales
P/EBITDA
High
Low
Mean
Current
Target
Multiple
Target x
Per Share
Target
Price
84.60
16.80
3.97
52.50
13.00
4.10
1.08
2.80
35.80
12.30
3.21
7.50
13.00
4.10
1.08
2.80
17.90
6.15
1.61
3.75
1.07
3.05
12.61
4.46
$19.15
18.75
20.25
16.74
Median
$18.95
Comparable Valuation: S&P 500
My valuation opinion on each relative multiple is based on the current trading level relative to the respective
group and the magnitude of the percentage differential to the mean. Because I do not foresee multiples
reaching five-year mean levels in the next twelve months, my valuation opinion is more heavily weighted
towards current relative trading levels. When comparing Comcast to the S&P 500, a similar undervaluation
story is formed. Comcast is currently trading above the S&P 500 on a Price-to-Forward Earnings and Price-toSales basis, but below the market index in terms of Price-to-Adjusted Cash Flow and Price-to-EBITDA. Not
surprisingly, all of the valuation metrics are currently near their five-year lows versus the S&P 500, indicating
ample room on the upside. I view this analysis as a confirmation of my positive opinion on Comcast’s stock.
Figure 12. CMCSA Relative to the S&P 500
P/Forward E
P/Adjusted Cash Flow
P/Sales
P/EBITDA
High
4.63
1.27
2.54
6.04
Low
0.91
0.57
1.21
0.52
Mean
2.26
1.04
2.10
0.91
Current
1.14
0.64
1.64
0.57
Percent from
Mean
(49.6)%
(38.5)%
(21.9)%
(37.4)%
Valuation
Opinion
In-Line
Low
In-Line - High
Low
Comparable Valuation: Consumer Discretionary
Comcast is undervalued in comparison to the Consumer Discretionary sector as well. I view this
undervaluation as a surprise. When I think of discretionary items consumers are likely to cut amidst job
uncertainty and budget pressures, I think of vacations, cruises, new cars and big-ticket electronics—not cable
TV, phone, and Internet! These are mainstays in the minds of most consumers, therefore I feel Comcast
should be trading at a premium to its discretionary peers in this economic climate.
Figure 13. CMCSA Relative to the Consumer Discretionary Sector
P/Forward E
P/Adjusted Cash Flow
P/Sales
P/EBITDA
High
4.35
1.54
3.91
5.91
Low
0.47
0.67
2.13
0.33
Mean
1.83
1.17
3.25
0.96
16
Current
0.52
0.71
2.58
0.35
Percent from
Mean
(71.6)%
(39.3)%
(20.6)%
(63.5)%
Valuation
Opinion
Low
Low
High
Low
Comparable Valuation: Cable & Satellite TV Industry
Comcast’s valuation relative to the Cable and Satellite TV industry confirms my beliefs that within the Cable
and Satellite TV industry, cable MSOs are better positioned than their satellite TV providing peers. Investors
have noticed this as well, hence the high valuation opinions. If I were to assume that these multiples would
also only revert to 50 percent of the five-year mean, these would be enormous overvaluations, with the sole
exception being Price-to-EBITDA. Despite these trading levels relative to its closest peers, I am still confident
that Comcast is a buy and is worth the $18.95 per share my multiples valuation suggests. Comcast is, in my
opinion, the best of class in this industry and this analysis confirms that belief.
Figure 14. CMCSA Relative to the Cable & Satellite TV Industry
P/Forward E
P/Adjusted Cash Flow
P/Sales
P/EBITDA
High
Low
Mean
Current
Percent from
Mean
Valuation
Opinion
2.61
1.32
1.67
2.36
0.96
0.69
1.06
0.34
1.44
1.01
1.39
0.98
1.23
1.06
1.31
0.36
(14.6)%
5.0%
(5.8)%
(63.3)%
High
High
High
Low
Summary
Comcast currently trades cheap on an absolute basis, relative to the S&P 500, and relative to the Consumer
Discretionary sector, but expensive when compared to other Cable and Satellite TV providers. As a whole, I
believe Comcast is undervalued; the expensive valuation relative to its closest peers is a validation of my view
that Comcast is the best of its breed in this industry. Therefore, my comparative multiples price for Comcast is
$18.95, the median of my target share prices. This target price is 51 percent above the current price and is
supported by Comcast’s resilient competitive position, strong balance sheet, high FCF growth, and track
record of increasing returns on assets and equity.
Equity Valuation: Discounted Cash Flow
In an effort to confirm the relative valuation determined by the comparative multiples analyses, I created a
discounted cash flow (DCF) model, which will determine the intrinsic value of Comcast. As I mentioned in the
Financial Analysis section of this report pertaining to Capital Expenditures and Free Cash Flow, the DCF is a
multiple scenario model. The decision to run two different scenarios was driven by the model’s sensitivity to
Comcast’s capital expenditures. At this point, Comcast’s cable plant has the ability to compete with the
incumbent RBOCs and has sufficient bandwidth for future growth. Nevertheless, technological advancements
are constantly driving change in this industry and a major upgrade cycle may be within the forecasts of my
DCF model. Because of this possibility, I have a base case scenario and a plant upgrade scenario. Using the
assumptions explained below, the base case scenario generates an intrinsic value of $21.62 and the plant
upgrade scenario returns an intrinsic value of $17.15 for Comcast. I assign a smaller probability to the plant
upgrade scenario by assigning it a 10 percent weighting versus 45 percent for the base case scenario and the
comparative multiples valuation.
Base Case Scenario
Revenue Forecast
Comcast’s revenue forecast was difficult to determine for two primary reasons (1) a model driven by the
projected subscribers for each service did not work because most subscribers choose to bundle and there is
no way to discern how many subscribers are bundling, what services they are bundling, and how much
revenue they are generating and (2) the potential impact of competition from the RBOCs.
I chose not to build a model that was driven by subscribers for the first reason mentioned, and because a
model with that amount of detail may actually distort results. To determine what type of an impact the RBOCs
are going to have on Comcast’s growth, I forecasted the amount of Comcast’s footprint that is expected to
17
overlap with Verizon and AT&T’s service over the next four years. This analysis, which is shown in Figure 15,
helped to determine annual growth rates for the cable segment amidst the increase in competition. The
compound annual growth rate for Comcast’s total revenue over the forecast period is 5.6 percent and as long
as the Company does not pursue any major acquisitions, I believe this is an appropriate top-line growth rate.
Figure 15. CMCSA Footprint Overlap with Verizon and AT&T13
In 000s, unless otherwise stated.
2008A
2009E
2010E
2011E
2012E
Verizon's FiOS
Comcast Households Passed
x % of CMCSA Footprint Overlapping with VZ
= Overlapping Households
50,600
38%
19,228
51,153
38%
19,438
51,869
38%
19,710
52,595
38%
19,986
53,331
38%
20,266
FiOS Households Passed
/ VZ Total Households Passed
= FiOS Households Passed as % of Total VZ Households
x Overlapping Households with CMCSA
= FiOS Households Passed in CMCSA Territory
/ Comcast Households Passed
= % of Comcast Footprint Covered by FiOS
12,500
30,603
41%
19,228
7,854
50,600
15.5%
15,000
30,909
49%
19,438
9,433
51,153
18.4%
18,000
31,218
58%
19,710
11,365
51,869
21.9%
18,000
31,530
57%
19,986
11,410
52,595
21.7%
18,000
31,846
57%
20,266
11,455
53,331
21.5%
AT&T U-Verse
Comcast Households Passed
x % of CMCSA Footprint Overlapping with AT&T
= Overlapping Households
50,600
45%
22,770
51,153
45%
23,019
51,869
45%
23,341
52,595
45%
23,668
53,331
45%
23,999
U-Verse Households Passed
/ AT&T Total Households Passed
= FiOS Households Passed as % of Total AT&T Households
x Overlapping Households with CMCSA
= U-Verse Households Passed in CMCSA Territory
/ Comcast Households Passed
= % of Comcast Footprint Covered by U-Verse
17,000
61,206
28%
22,770
6,324
50,600
12.5%
23,500
61,818
38%
23,019
8,751
51,153
17.1%
30,000
62,436
48%
23,341
11,215
51,869
21.6%
30,000
63,061
48%
23,668
11,259
52,595
21.4%
30,000
63,391
47%
23,999
11,358
53,331
21.3%
28%
36%
44%
43%
43%
% of Comcast Footprint Covered by RBOC Video
Income Statement and Balance Sheet
The assumptions I made regarding the income statement and necessary balance sheet line items are listed
below:
Revenue: Historical growth rates and competition analysis used for Cable segment. I used historical
growth rates for the Programming and Corporate and Other segments. Programming segment revenue
slowed in 2009 and 2010 due to the soft advertising environment.
Operating Costs: Determined by gross margin expectations. Used the median of the past three years,
which is when high-speed data and phone became a considerable part of the product mix.
Selling, General and Administrative: Set as a percentage of sales and kept constant at median of past
three years.
Depreciation: Set as a percentage of sales. This figure is declining as capital expenditures wane, but with
a one-year lag which has been the case over the past several years. Depreciation has been greater than
capital expenditures over the past five years, and I assumed this going forward.
Amortization: Set as a percentage of sales and kept constant at median of past three years.
Operating Margin: Set as result of above assumptions. Margin expansion is occurring due to operational
efficiency improvements and growth in high-speed data and phone subscribers, which have higher
margins than video.
13
FiOS and U-Verse data pulled from Company 2008 10-k’s
18
Interest Expense: Set as a percentage of sales based on the median of the past three years. Implicit in
this assumption is that Comcast’s capital structure remains conservative and leverage ratios stay within
2.5x to 3.0x, which management has pledged.
Income Tax Expense: Assumed a 37.8 percent tax rate.
Other income statement line items were modeled based on an extrapolation of past levels.
Accounts Receivable: Set as a percentage of sales based on median of past three years and kept
constant going forward.
Accounts Payable: Set as a percentage of sales and kept at the 2008 level of 9.9 percent of sales due to
a declining trend over the past six years.
Discount Rate and Terminal Value
Figure 16. DCF Base Case Scenario Target Share
Price Sensitivity Analysis
Terminal Discount Rate and Terminal FCF Growth Rate
Terminal
Discount
Rate
Terminal Discount Rate: 11.0 percent. I
cross-checked this discount rate with the
CAPM, which returned a discount rate of
10.7 percent. I chose not to adjust the rate
because the market risk premium inputted
into the CAPM is highly subjective and
volatile given current market conditions.14
The sensitivity analysis in Figure 16
displays the target DCF share price for a
range of discount rates and terminal growth
rates.
21.6
9.0%
10.0%
11.0%
12.0%
13.0%
1.0%
26.26
23.04
20.48
18.40
16.68
Terminal FCF Growth Rate
1.5%
2.0%
2.5%
27.27
28.42
29.75
23.77
24.59
25.52
21.02
$21.62
22.29
18.81
19.26
19.76
17.00
17.34
17.72
3.0%
31.30
26.57
23.05
20.31
18.14
Terminal Free Cash Flow Growth Rate: 2.0 percent
Using the aforementioned assumptions, I derived a DCF intrinsic value of $21.62 under the base case
scenario. This is close to the comparative multiples target share price of $18.95. It also further supports my
conclusion that Comcast is undervalued at its current price of $12.50.
Plant Upgrade Scenario
Adjustments Made to Base Case Scenario
Figure 17. DCF Plant Upgrade Scenario Target
Share Price Sensitivity Analysis
Terminal Discount Rate and Terminal FCF Growth Rate
Terminal
Discount
Rate
Revenue: Growth declined and resulted in
a compound annual growth rate over the
forecast period of 4 percent. This
assumption was made because a plant
upgrade will likely occur when competition
or technology causes the current plant to
become obsolete and revenue growth has
slowed.
17.2
9.0%
10.0%
11.0%
12.0%
13.0%
1.0%
20.61
18.22
16.31
14.76
13.47
Capital Expenditures and Depreciation:
Capital expenditures peak in 2014 as a
result of the plant upgrade. Depreciation
increases, albeit at a lower rate similar to historical depreciation trends.
Terminal FCF Growth Rate
1.5%
2.0%
2.5%
21.36
22.20
23.18
18.76
19.36
20.04
16.71
$17.15
17.64
15.06
15.39
15.76
13.70
13.95
14.23
3.0%
24.32
20.82
18.20
16.16
14.54
Using the abovementioned assumptions, I derived a DCF intrinsic value of $17.15. Not surprisingly, this is
below the comparative multiples valuation of $18.95, yet it still provides an upside to the current share price
by 37 percent.
14
Market risk premium used in CAPM analysis is based on recent analyst reports.
19
Summary
Strengths and Opportunities
Comcast has several strengths and opportunities in the current market. The Company enjoys a diverse and
recurring revenue stream, and subscription based products that are a regular part of most consumers’ lives.
These characteristics shield the Company from large fluctuations in cash flow, which is increasingly favorable
in turbulent economic times such as these. Comcast has built and acquired a base cable plant that is
technologically competitive and economically upgradeable. As a result capital expenditures are expected to
decline as a percentage of sales and on an absolute basis over the next two years, which will drive free cash
flow growth. The subsequent increases in free cash flow will enable the Company to maintain its commitment
of returning capital to shareholders through dividends and share buybacks. Furthermore, as the DuPont
analysis pointed out, Comcast’s financials reveal strong, well-managed growth and show bright prospects for
growth in the future. The comprehensive valuation analyses performed for Comcast suggests an intrinsic
value well above the current share price, which in combination with increasing dividends and share
repurchases, will deliver strong returns to shareholders.
Comcast’s robust financial position and conservative capital allocation strategy provides the Company with
the flexibility necessary to take advantage of positive-NPV opportunities as they arise. Comcast is ramping up
their offerings for small-medium sized businesses and has experienced recent success with a 41 percent
increase in revenue from this market in 2008. I believe the Company will continue to see momentum in this
business even during a tough economic climate because of its low telephone penetration and competitive
pricing tactics. Comcast is also in the process of migrating its high-speed data service to DOCSIS 3.0, which
will significantly increase bandwidth, creating faster internet speeds and enabling the Company to provide
more advanced entertainment services.
Risks and Concerns
There are several risks to my thesis, including execution of the voice rollout and increased competition from
satellite and telecom companies. The economy remains another wild card in terms of future subscriber
growth. Phone service is the most highly correlated cable product with housing growth, and the slowdown
may threaten voice penetration in the near-term. Also, the slowing economy may lead more consumers to
forgo land lines entirely, in favor of their cell phones.15 Moreover, if Comcast experiences higher than
projected capital expenditures and pursues the build-out of an expansive wireless network or plant upgrade,
my free cash flow estimates will be affected. Finally, a large acquisition or investment with uncertain returns
(such as in to the wireless business) could have a negative impact on the stock. I feel that these risks were
appropriately accounted for in my valuation methods through the terminal discount rate in the DCF valuations,
and also by calculating the target multiple prices using a 50 percent mean reversion rule.
There are two concerns I have identified regarding Comcast that could have an effect on shareholder returns.
First, as I mentioned in the Regulatory Environment section of the Industry Analysis, Comcast is tightly
regulated by the FCC and could be negatively impacted by new legislation, FCC rules, or ownership caps.
Second, Comcast’s voting structure contains non-dilutable Class B shares, all of which are beneficially owned
by the C.E.O., Brian Roberts. The structure of the shares allows the C.E.O. to maintain effective control of the
Company even if Comcast uses equity to fund a large acquisition. In order to override the C.E.O, three
quarters of the Class A shareholders would have to vote against him. I believe it would be hard to gather that
many votes against the C.E.O., which essentially limits any shareholder attempt to enact change.
15
Credit Suisse research report dated 18-February-2009
20
Conclusions
The benefits clearly outweigh the potential risks for this stock. Comcast has the largest cable footprint in the
U.S. and is in a strong competitive position to maintain and grow its market share. I believe the Company has
made the appropriate adjustments to anticipate slowing economic growth, is proactively managing expenses,
and is generating sufficient free cash flow to grow the Company and produce above-average returns for
shareholders. I am recommending Comcast as an immediate BUY and am assigning a one-year price target
of $19.97, which is the price resulting from a .45 weighting to the DCF: Base Case and Comparative Multiples
valuation, and a .10 weighting to the DCF: Plant Upgrade scenario. These weights were determined from my
confidence in the valuation methods and the likelihood of a major plant upgrade occurring. A major merger or
acquisition or increase in government regulation would warrant a reassessment of this recommendation.
Figure 18. Target Share Prices vs. Current Share Price
DCF: Base Case Target Price
Multiple Target Price
DCF: Plant Upgrade Target Price
Target
Price
Weighting
Price
Composition
$21.62
18.95
17.15
45%
45%
10%
$9.73
8.53
1.72
100%
$19.97
Final Target Price
$21.62
$19.97
$18.95
59.8%
Upside
Final Target Price
$17.15
73.0%
Upside
51.6%
Upside
DCF: Base Case
Target Price
Multiple Target Price
Current Share Price
21
37.2%
Upside
DCF: Plant Upgrade
Target Price
Table of Figures
Figure 1. Comcast’s National Footprint
Figure 2. Comcast’s Cable Segment Revenue Breakdown by Product Category
Figure 3. Comcast’s Product Penetration
Figure 4. Regression of Comcast’s Enterprise Value/Sales Ratio and Economic Factors
Figure 5. Ten-Year Price Performance: Cable & Satellite vs. Consumer Discretionary vs. S&P 500
Figure 6. Subscription and Advertising Revenue as a % of Total Revenue, 2008
Figure 7. Broadband Household Forecast, 2008E—2013E
Figure 8. Three Factors Continue to Increase Competition
Figure 9. Five-Year Historical Cable & Satellite TV Comparative Multiples Analysis
Figure 10. DuPont Analysis for Comcast
Figure 11. CMCSA Absolute Valuation
Figure 12. CMCSA Relative to the S&P 500
Figure 13. CMCSA Relative to the Consumer Discretionary Sector
Figure 14. CMCSA Relative to the Cable & Satellite TV Industry
Figure 15. CMCSA Footprint Overlap with Verizon and AT&T
Figure 16. DCF Base Case Scenario Target Share Price Sensitivity Analysis
Figure 17. DCF Plant Upgrade Scenario Target Share Price Sensitivity Analysis
Figure 18. Target Share Prices vs. Current Share Price
22
3
4
5
6
8
9
10
10
12
15
16
16
16
17
18
19
19
21
Appendix 1 Comcast Financial Statements from Company 10-k
Consolidated Balance Sheet
December 31 (in millions, except share data)
2008
2007
Assets
Current Assets:
Cash and cash equivalents
$
Investments
Accounts receivable, less allowance for doubtful accounts of $190 and $181
Deferred income taxes
Other current assets
Total current assets
Investments
1,195
$
963
59
98
1,626
1,645
292
544
214
747
3,716
3,667
4,783
7,963
Property and equipment, net of accumulated depreciation of $23,235 and $19,808
24,444
23,624
Franchise rights
59,449
58,077
Goodwill
14,889
14,705
4,558
1,178
4,739
642
$ 113,017
$ 113,417
$
$
Other intangible assets, net of accumulated amortization of $8,160 and $6,977
Other noncurrent assets, net
Total assets
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses related to trade creditors
Accrued salaries and wages
Other current liabilities
Current portion of long-term debt
Total current liabilities
3,393
3,336
624
494
2,644
2,278
2,627
1,495
8,939
7,952
Long-term debt, less current portion
30,178
29,828
Deferred income taxes
26,982
26,880
6,171
7,167
297
250
Other noncurrent liabilities
Minority interest
Stockholders’ equity
Preferred stock—authorized, 20,000,000 shares; issued, zero
Class A common stock, $0.01 par value
1
Class A Special common stock, $0.01 par value
Class B common stock, $0.01 par value
Additional paid-in capital
2
3
Retained earnings
4
Treasury stock
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
1
2
3
4
Authorized, 7,500,000,000 shares; issued, 2,426,443,484 and 2,419,025,659; outstanding, 2,060,982,734 and 2,053,564,909
Authorized, 7,500,000,000 shares; issued, 881,145,954 and 1,018,960,463; outstanding, 810,211,190 and 948,025,699
Authorized, 75,000,000 shares; issued and outstanding, 9,444,375
365,460,750 Class A common shares and 70,934,764 Class A Special common shares
23
—
—
24
24
9
10
—
—
40,620
41,688
7,427
7,191
(7517)
(113)
(7517)
(56)
40,450
41,340
$113,017
$113,417
Consolidated Statement of Operations
Year ended December 31 (in millions, except per share data)
2008
Revenue
$ 34,256
$
2007
2006
30,895
$ 24,966
Costs and Expenses:
Operating (excluding depreciation and amortization)
13,472
12,169
9,819
Selling, general and administrative
7,652
6,940
5,705
Depreciation
5,457
943
5,107
1,101
3,828
995
27,524
25,317
20,347
6,732
5,578
4,619
(2,439)
(2,289)
(2,064)
89
601
990
(39)
(285)
(63)
522
(65)
114
(2,674)
(1,229)
(1,025)
4,058
(1,533)
4,349
(1,800)
3,594
(1,347)
Minority interest
2,525
22
2,549
38
2,247
(12)
Income from continuing operations
2,547
2,587
2,235
—
—
—
—
103
195
Amortization
Operating income
Other Income (Expense):
Interest expense
Investment income (loss), net
Equity in net income (losses) of affiliates, net
Other income (expense)
Income from continuing operations before income taxes and minority interest
Income tax expense
Income from continuing operations before minority interest
Income from discontinued operations, net of tax
Gain on discontinued operations, net of tax
Net income
$
2,547
$
2,587
$
2,533
$
0.87
$
0.84
$
0.71
Basic earnings per common share
Income from continuing operations
Income from discontinued operations
—
—
Gain on discontinued operations
Net income
—
—
0.03
0.06
$
0.87
$
0.84
$
0.80
$
0.86
$
0.83
$
0.70
Diluted earnings per common share
Income from continuing operations
Income from discontinued operations
—
—
Gain on discontinued operations
Net income
Dividends declared per common share
24
$
0.86
$
0.25
—
—
$
0.83
—
0.03
0.06
$
0.79
—
Consolidated Statement of Cash Flows
Year ended December 31 (in millions)
2008
2007
2006
Operating Activities
Net income
$
2,547
$
2,587
$
2,533
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation
5,457
5,107
3,828
Amortization
943
1,101
995
—
—
139
Share-based compensation
258
212
190
Noncash interest expense (income), net
209
114
99
39
63
65
321
(938)
(920)
(736)
Depreciation and amortization of discontinued operations
Equity in net losses (income) of affiliates, net
(Gains) losses on investments and noncash other (income) expense, net
Gain on discontinued operations
—
—
Noncash contribution expense
—
11
33
Minority interest
(22)
(38)
12
Deferred income taxes
495
247
674
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
Change in accounts receivable, net
Change in accounts payable and accrued expenses related to trade creditors
Change in other operating assets and liabilities
Net cash provided by (used in) operating activities
39
(100)
(357)
(38)
(17)
175
(352)
560
(497)
10,231
8,189
6,618
Financing Activities
Proceeds from borrowings
3,535
3,713
7,497
Retirements and repayments of debt
(2,610)
(1,401)
(2,039)
Repurchases of common stock
(2,347)
(2,800)
(3,102)
Dividends paid
(547)
—
—
Issuances of common stock
53
(153)
412
62
410
25
(2,522)
(316)
3,546
(4,395)
Other
Net cash provided by (used in) financing activities
Investing Activities
Capital expenditures
(5,750)
(6,158)
Cash paid for intangible assets
(527)
(406)
(306)
Acquisitions, net of cash acquired
(738)
(1,319)
(5,110)
Proceeds from sales of investments
737
1,761
2,720
(1,167)
(32)
(2,089)
62
(2,812)
31
Net cash provided by (used in) investing activities
(7,477)
(8,149)
(9,872)
Increase (decrease) in cash and cash equivalents
232
963
(276)
1,239
292
947
Purchases of investments
Other
Cash and cash equivalents, beginning of year
$
Cash and cash equivalents, end of year
25
1,195
$
963
$
1,239
26
2,215
6.26%
1,806
37.8%
22
2,997
18%
6,878
19.44%
(185)
-0.52%
5,696
16.10%
2,674
7.81%
1,533
37.8%
22
2,547
6,400
18.68%
76
0.22%
5,750
16.79%
Interest - net
Interest % of Sales
Taxes
Tax Rate
Minority Interest
Net Income
% Growth
1,195
32,456
Cash
Debt
21.62
72.98%
$
Implied equity value/share
12.50
Upside/(Downside) to DCF
$
2,952.0
Shares Outstanding
Current Price
87,770
32,918
30,911
63,829
5.13%
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Free Cash Flow
YOY growth
52%
48%
3,995
22%
6,995
19.77%
6,732
19.65%
Operating Income
Operating Margin
3,273
35,376
3.27%
34,256
Revenue
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
2009E
2008E
Year
DCF Valuation
3/4/2009
Ticker: CMCSA
Joshua Bernath
4,750
19%
7,175
19.39%
72
0.20%
5,660
15.30%
3,163
6%
1,907
37.8%
22
2,316
6.26%
7,364
19.91%
36,996
4.58%
2010E
5,131
8%
7,526
19.34%
85
0.22%
5,836
15.00%
3,356
6%
2,024
37.8%
22
2,435
6.26%
7,793
20.03%
38,904
5.16%
2011E
5,279
3%
7,696
18.75%
85
0.21%
6,033
14.70%
3,531
5%
2,130
37.8%
22
2,569
6.26%
8,209
20.00%
41,044
5.50%
2012E
Terminal Discount Rate =
Terminal FCF Growth =
5,618
6%
7,983
18.35%
90
0.21%
6,265
14.40%
3,809
8%
2,299
37.8%
22
2,724
6.26%
8,810
20.25%
43,507
6.00%
6,008
7%
8,317
17.95%
96
0.21%
6,533
14.10%
4,127
8%
2,493
37.8%
22
2,901
6.26%
9,499
20.50%
46,335
6.50%
Forecast
2013E
2014E
11.0%
2.0%
6,454
7%
8,701
17.55%
103
0.21%
6,842
13.80%
4,492
9%
2,714
37.8%
22
3,104
6.26%
10,287
20.75%
49,578
7.00%
2015E
6,902
7%
9,055
17.15%
110
0.21%
7,128
13.50%
4,865
8%
2,940
37.8%
22
3,305
6.26%
11,088
21.00%
52,801
6.50%
2016E
Revenue Case
Operating Margin Case
D&A Case
Capex Case
7,311
6%
9,331
16.75%
116
0.21%
7,353
13.20%
5,218
7%
3,154
37.8%
22
3,487
6.26%
11,837
21.25%
55,705
5.50%
2017E
1
1
1
1
Terminal
P/E
EV/EBITDA
Free Cash Yield
7,744
6%
9,609
16.35%
122
0.21%
7,581
12.90%
5,595
7%
3,383
37.8%
22
3,679
6.26%
12,635
21.50%
58,769
5.50%
2018E
87,769.7
15.7
5.35
8.82%
Terminal
Value
Appendix 2 Discounted Cash Flow Model: Base Case Scenario
27
2,215
6.26%
1,806
37.8%
22
2,997
18%
6,878
19.44%
(185)
-0.52%
5,696
16.10%
2,674
7.81%
1,533
37.8%
22
2,547
6,400
18.68%
76
0.22%
5,750
16.79%
Interest - net
Interest % of Sales
Taxes
Tax Rate
Minority Interest
Net Income
% Growth
1,195
32,456
Cash
Debt
17.15
37.21%
$
Implied equity value/share
12.50
Upside/(Downside) to DCF
$
2,952.0
Shares Outstanding
Current Price
64,546
27,897
22,732
50,629
6.46%
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Free Cash Flow
YOY growth
55%
45%
3,995
22%
6,995
19.77%
6,732
19.65%
Operating Income
Operating Margin
3,273
35,376
3.27%
34,256
Revenue
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
2009E
2008E
Year
DCF Valuation
3/4/2009
Ticker: CMCSA
Joshua Bernath
4,861
22%
7,175
19.39%
72
0.20%
5,549
15.00%
3,163
6%
1,907
37.8%
22
2,316
6.26%
7,364
19.91%
36,996
4.58%
2010E
5,131
6%
7,526
19.34%
85
0.22%
5,836
15.00%
3,356
6%
2,024
37.8%
22
2,435
6.26%
7,793
20.03%
38,904
5.16%
2011E
4,927
-4%
7,659
18.75%
85
0.21%
6,332
15.50%
3,514
5%
2,120
37.8%
22
2,557
6.26%
8,170
20.00%
40,850
5.00%
2012E
Terminal Discount Rate =
Terminal FCF Growth =
4,894
-1%
7,897
18.50%
89
0.21%
6,830
16.00%
3,738
6%
2,256
37.8%
22
2,672
6.26%
8,644
20.25%
42,688
4.50%
3,715
-24%
8,102
18.25%
92
0.21%
8,435
19.00%
3,956
6%
2,388
37.8%
22
2,779
6.26%
9,101
20.50%
44,395
4.00%
Forecast
2013E
2014E
11.0%
2.0%
4,396
18%
8,426
18.25%
96
0.21%
8,311
18.00%
4,185
6%
2,527
37.8%
22
2,890
6.26%
9,581
20.75%
46,171
4.00%
2015E
4,982
13%
9,080
19.00%
99
0.21%
8,602
18.00%
4,405
5%
2,661
37.8%
22
2,991
6.26%
10,035
21.00%
47,787
3.50%
2016E
Revenue Case
Operating Margin Case
D&A Case
Capex Case
5,576
12%
9,229
18.75%
102
0.21%
8,368
17.00%
4,613
5%
2,787
37.8%
22
3,081
6.26%
10,459
21.25%
49,221
3.00%
2017E
2
1
2
2
Terminal
P/E
EV/EBITDA
Free Cash Yield
5,695
2%
9,379
18.50%
105
0.21%
8,619
17.00%
4,830
5%
2,919
37.8%
22
3,174
6.26%
10,900
21.50%
50,697
3.00%
2018E
64,545.8
13.4
4.72
8.82%
Terminal
Value
Appendix 3 Discounted Cash Flow Model: Plant Upgrade Scenario