A Small Sacrifice for a Better Investment

Comcast (CMCSA) acquired NBCUniversal in 2011 to gain control of its valuable media assets... 

These included big cable networks like MSNBC, CNBC, USA, E!, Syfy, and Oxygen.

And viewers caught on quickly... They couldn't get enough of all the extra news, sports, and film options.

The networks thrived, generating tons of cash in the booming U.S. cable market.

Yet, times change... and so do people's preferences.

Streaming services began offering more flexibility and lower costs than cable companies. That led to years of "cord-cutting," where millions of folks canceled their cable subscriptions.

By 2024, 61% of Americans had made the switch from cable to streaming. So it's obvious that cable has lost its luster.

However, it still generates a lot of money... Comcast's cable segment logged $7 billion in sales in the 12 months ending on September 30. That makes up 6% of the company's total revenue.

But these cable assets are just slowly melting ice cubes.

And right now, the media giant has two options if it wants to entice investors – hold on to cable or focus more on its broadband business.

As we'll explain today, the company is clearly pursuing one option over the other.

Comcast is trying to shed some of its 'cable weight'...

Although cable services are still bringing in decent cash, investors aren't interested in these assets anymore.

That's a big reason why Comcast recently announced a spin-off of its NBCUniversal cable networks...

The deal will include channels like E!, USA, and MSNBC. Bravo, streaming service Peacock, and the NBC broadcast network will stay with the "mother ship."

To better understand why Comcast is trimming its cable segment, we should look at its Uniform price-to-earnings (P/E) ratio...

As many readers know, the P/E ratio measures a company's market price versus earnings per share... And the higher the ratio, the higher the valuation.

Comcast's overall valuation is 13.7 times. That's well below the 20 times corporate average... It also sits firmly between two of Comcast's closest competitors.

Warner Bros. Discovery (WBD) has a similar cable footprint... It owns popular networks such as CNN, TNT, and TBS. And right now, Warner Bros. is trading at a 12.6 times Uniform P/E ratio.

While it's not a perfect comparison, this gives us an idea of how investors value cable businesses these days.

Simply put, Comcast's cable segment is dragging down a potentially higher Uniform P/E ratio.

Thankfully, the media giant has a 'secret' weapon...

In addition to cable, Comcast provides high-speed broadband services to residential and business customers... That includes Wi-Fi and nationwide hotspot access.

The company has spent billions of dollars laying down the infrastructure to connect people's homes. In fact, broadband forms the majority of its business, generating about 60% of revenue.

Charter Communications (CHTR) – a leading telecommunications firm – has similar broadband operations. And as of 2024, the company is trading at a higher 15.8 times Uniform P/E ratio.

The bottom line is, investors are more interested in broadband operations than cable networks.

And Comcast is finally getting the message. Although it has a foothold in both areas, the market has a clear preference. And it's saying that...

Comcast needs to prioritize its broadband business...

The media giant is cutting out the cable assets that are weighing it down. And the NBCUniversal spin-off is a key part of that strategy.

With fewer cable networks to worry about, Comcast can focus on developing and selling its broadband services.

This move will boost the company’s valuation... and make it more competitive with industry peers like Charter Communications.

In time, that should help the media giant become much more appealing to investors.

Regards,

Joel Litman
December 11, 2024