I recently came across a post on the Wall Street Cheat Sheet blog (Turn On, Tune In, Drop Out: CNBC Ratings Get Smashed) that tells of a large decline in ratings for CNBC programming.  The table of data below shows that, according to Nielson ratings service, viewership during the day has collapsed 24% in the past year during the business day.  Prime-time viewership has fallen by 34% between 2009 and 2010 for the period essentially covering the month of January.  Clearly, this is not what CNBC had hoped for and will surely affect their advertising rates.  Damien Hoffman, who wrote the post, concludes, “It’s definitely correlated to the value CNBC offers to our investment accounts.”

Hoffman’s post disparages the oft-criticized leading business news channel, and the drop in ratings is certainly notable.  However, we think his conclusion was very close to having the right idea. We think it would be much more accurate if he were to just take out the “CNBC offers to” and replace it with “of”.  CNBC’s ratings are correlated to the value of our investment accounts, and this one-month snapshot only serves to demonstrate this point.

If you will recall, on January 2nd the Dow closed around 9,034 and by the end of the month it had fallen back down to 8,000.  At that time, the DJIA was at its lowest point in nearly six years and the declines showed now signs of stopping.  The market was in a nasty multi-quarter downtrend and people watched because they were seeing their hard earned retirement accounts slipping away.  The ratings were not better because the programming was far more helpful or interesting; it was because investors were frightened and needed to learn all that they could about what was happening.  Fast forward to last month and the market and the economy are in the midst of a recovery, and while the market fell in the month it is clearly not a time to panic.  It is no coincidence that monthly ratings for CNBC doubled between October 2007 and October 2008, and then fell right back in line with 2007 in 2009.

Furthermore, in January of 2009 the government was in transition as a new Presidential Administration took office.  Investors were uncertain about what policies the new administration might pursue first and how that would affect their portfolio.  It was a fast paced time in the news cycle as President Obama nominated important cabinet positions, all in the midst of an economy in rapid decline.  Surely, the CNBC-haters will blame some of this on the “exaggerated rhetoric” of CNBC regarding the financial meltdown. 

Unfortunately, we do not have access to a similar report from Fox Business Network or Bloomberg in order to compare their ratings trends.  That being said, to claim the drop in ratings (based on a one month snapshot) has anything to do with the quality of content denies the obvious driving factor.  It is all related to consumer’s demands, and a year ago many more people believed the financial world was vital to their wellbeing.

Ockham has no affiliation with CNBC or any of the companies that have ownership in the network.

“Comcast reporting a quarter that looked on the face of it pretty good. But as you might expect, a lot of investors still waiting. There is what they call “a strategic overhang” when it comes to Comcast and its future. That is the deal that I’ve been talking about for NBC Universal, which we’ll get to at the end of this report.

But as for the numbers, you see it their earnings per share, not bad. They increase subscriber ads across every category except basic video. But we’ve seen that. Cablevision yesterday, basic video subs losing them. That’s sort of a story at cable. But Comcast will say, hey, we’re losing the number at a slower rate than we were losing them last quarter. EPS, up to 33 cents or 27%, generated $1.1 billion in free cash flow…” — CNBC’s Squawk on the Street 11/4/2009

Comcast (CMCSA) reported earnings on Wednesday morning that were quite strong financially speaking.  The stock was up following the earnings release but that did not last long, and in afternoon trading the stock is down more than 2% on the day.  The reason for the sell off is what the pundit on CNBC this morning described as strategic overhang as investors await more concrete details on the fate of the deal for NBC Universal.  Management refused to discuss the negotiations which have been widely reported and even went so far as to call the talks “rumors”.  Clearly, CEO Brian Roberts and his team hoped to separate the past quarter’s good results from the potential of this deal.

From the report, Comcast gained a total of 1.067 million revenue-generating units in the quarter, which was better than most analysts had expected.  Broadband Internet and digital voice both were the sources of gains, while basic video subscribers fell at an improved rate than the past few quarters.  In addition, the average monthly billing per customer rose to $116.91 from $110.67 a year ago.  In sum, revenue grew by 3% to $8.5 billion just under the analysts estimates of $8.55.  Net income rose by 22.5% to $944 million or 33 cents per share.  Excluding items the cable giant brought in 28 cents per share or three cents better than expected.

For us, the free cash flow was the most impressive fundamental improvement of the report.  Comcast tallied $1.112 billion in free cash flow for the quarter, up nearly 20%.  This was enabled in part by cuts to capital spending by 6%.  However, many investors fear that a deal to buy a majority stake in NBCU would eat away a lot of this cash and possibly their ability to generate it as rapidly in the future.  Surely some investors would like to see Comcast continue to grow organically rather than take the risks associated with NBCU.

If you discount the possibility of the deal for NBCU, we think that Comcast stock is extremely attractively priced.  In fact, our methodology has a Greatly Undervalued rating on the stock because we evaluate stocks based on standard reported metrics such as price-to-cash earnings, price-to-sales, dividends, ROE, etc and by any of our measures Comcast is attractive.  Management at Comcast must agree that their stock is too cheap as they bought back $250 million in shares in the quarter, and $3.6 billion more has been set aside for further share repurchases.  For a long term investor who believes that the market is overreacting to the possible NBCU acquisition, this stock should be right in the sweet spot.  With the negotiations with NBCU parent General Electric (GE) likely in the final stages, a deal or lack thereof will be known in the next few weeks.

Whispers, speculation, and rumors are swirling about a possible deal linking Comcast (CMCSA), the nations largest cable provider, and NBC Universal, majority owned by General Electric (GE).  Thus far the deal has been panned by Comcast investors and the stock has slid about 5% since they confirmed that there had been talks surrounding a deal.  In the beginning, it appeared that Comcast would want between a 20% and 50% stake in the company, but now the predominant theory is that NBCU would be spun off and Comcast would take a 51% controlling interest.

If an offer does materialize, we will be very interested to see whether it attracts a lot of attention from regulators; odds are it will.  Comcast is the largest cable company with about a 25% market share in the U.S., and already has some small cable networks that it controls.  However, NBCU is a huge network (NBC, Bravo, USA Network, CNBC, MSNBC and Telemundo, among others)and could present many more anti-trust issues.  The deal would have to include terms allowing NBC’s content to be available on competing television service providers like DirecTV (DTV) and Verizon (VZ) and others.

“I think the potential for more deals like that certainly is really ripe because, you know, a lot of media companies values are depressed right now so it means opportunities for putting together unusual partnerships and alliances. If Comcast and NBC Universal were to put their properties together though, I think there’s going to be a hail storm of protest from various government agencies.  You’re taking a lot of concentration of power both putting programming together with Comcast programming assets and NBC Universal’s, together with Comcast distribution that’s going to create all sorts of problems for them.” — Fox Business Network 10/2/2009

Of course, television programing would be the largest area of concern for regulators, but there are many other media assets they would gain through a joint venture in NBC Universal.  With advertising rates and DVD sales slumping in this recession, NBC is probably quite cheap compared to where it has historically been valued, and Comcast CEO Brian Roberts is never one to shy away from a good opportunity.  The deal has been described by insiders as being in the preliminary stages, but the clock is ticking.  Vivendi, which owns 20% of NBCU, is investigating dumping their stake, but they have an annual window from Nov. 15th through Dec. 10th in which contractually they are able to sell their stake.

Should Comcast make this move?  We think that at the right price it would be worth the trouble.  However, for a deal with this many moving parts, there is some doubt as to whether they can make it all happen in the next few months.  Furthermore, if they do decide to make the move, they are risking the fact that the regulators will allow it.  The initial reaction from analysts and the market has been quite negative, but that does not necessarily mean it isn’t worth doing.  Based on the current valuation, we believe Comcast is Greatly Undervalued, but that analysis is subject to change should this deal materialize.  Comcast has done a good job paying down debt over the last few years, and this move would undoubtedly take that effort a step back.

 Comcast (CMCSA) has become the first major cable company to begin offering wireless broadband accessible through a data card connection.  The company is rolling out its initial launch in Portland, Oregon today, and intends to have the service available in Philadelphia, Atlanta, and Chicago later this year.  Comcast, whose stock has fallen 16% this year, is trying to capitalize on the growing demand for mobile accessibility to internet and data services.  Comcast has long been known as provider of cable television, internet and telephone services to customer’s homes, but with “Comcast High-Speed 2go” Comcast is starting to provide services to customers on the go.

The network will utilize the fourth and newest generation of wireless technology or 4G, also known as WiMax.  The idea is to have the network blanket an entire metropolitan area instead of the Wi-Fi hotspot which provide high speed broadband internet only for a short distance.  The actual 4G network will be provided by Clearwire (CLWR), and this is the first incarnation of a product between Clearwire and Comcast since the two partnered together.  Comcast has spent more than $1 billion in this partnership last year alone.  Obviosuly, the 4G network is still a work in progress, so where not available Comcast will rely on the 3G network technology of Sprint/Nextel (S). 

The original promotion will reportedly be available for $49.95 per month for the metro service, which will include Comcast wired home service as well as a Wi-Fi router.  The non-promotion price is $73, and if you want nationwide access through Sprint’s network it will cost an additional $20.  It is not hard to imagine where Comcast will try and take this business; eventually abandoning wired internet service for the ease and mobility of wireless service.  Over the last few years the same transition has occurred in telephone services with households opting out of wired lines in favor of mobile phones, it is not much of a stretch to imagine seeing the same shift in internet service providers.  However, for now there are limitations and concerns about the strength of the signal penetration indoors, which could adversely effect speed.  In the near term it will be a supplement to the wired service rather than a replacement.  Furthermore, eventually Comcast would also like to offer their WiMax service to cell phones although no timetable has been revealed.

The line between cable companies and telecom companies continues to blur.  The telecom companies have thus far successfully infiltrated the television market, and now Comcast has become the first to roll out its much anticipated 4G broadband network.  As we mentioned earlier, Comcast stock has taken a hit this year even as the broad market has show gains.  At Ockham, we believe that Comcast stock has been too hard hit in this market, and the underlying fundamentals still suggest strength.  Earnings have outpaced estimates the last 3 quarters, and appear to rebounded from there low point last year.  Comcast receives a Greatly Undervalued valuation according to our ratings methodology, because the stock is selling well below its normal levels of price-to-sales and price-to-cash earnings.  Using a conservative expectations for long term earnings estimates (in this case fiscal 2010) of $1.09, well below consensus estimates, for Comcast to come back into more historical valuation ranges we would expect the stock to sell for more than $24.

Today’s announcement shows that Comcast is more than a “one-trick pony”, they are actively trying to grow their service offering.  There are of course concerns over Comcast’s core business for cable television surrounding the prevalence of television shows being available for free on the internet, but thus far it has not had an adverse effect on earnings.  Furthermore, Comcast aims to grab a large share of the WiMax market, so if you are Comcast and the internet threatens your television content, simply become a bigger provider of intenet.  Of course, it is more complicated than that, but there is no doubt that Comcast is getting a leg up on the competition in the next generation of internet access.

“I am recommending no cable companies. I was hoping that Apollo would not get Charter. And Comcast the would get their teeth into it. I don’t like this titanic battle between Fios and Comcast. I just think that Comcast is inexpensive but I can’t think of a catalyst to buy it. So, in other words I say, I got better fish to fry. Better cable companies too. Wow that’s mean. No, I don’t mean it.” Mad Money 3/30/2009

Cramer is down on Comcast (CMCSA) for various reasons, not the least of which being competition with Verizon’s (VZ) Fios service.  The Fios television service is growing rapidly as is the availability.  However, Cramer neglects to mention the other competition for viewers right now, including free alternatives on the web via providers such as Hulu.  Recent studies suggest that, at least for right now, the web television penetration is not hurting cable companies but that situation could change as computing power continues to grow and availability of broadband expands as well.  The online television world is developing rapidly and there are still quite a few unanswered questions, including how will it make enough money?  Clearly, what ever form online television takes there is a trend towards the internet and Comcast is hoping on board.  They are being proactive with their OnDemand Online service, interesting NYT blog about this here.

We have to disagree with Cramer about Comcast though because while it may not have a “catalyst” it is just too cheap to ignore.  We have placed the Greatly Undervalued valuation on Comcast because it is selling well below historical norms.  For instance, Comcast has normally traded in a historical range of price to sales between 2.1x and 3.5x, but the current metric is well below that range at 1.2x.  Similarly, the price to cash flow has normally ranged between 7.8x and 13.4x, while it is currently trading at just 4.7x.  We believe that the value in Comcast, whose fundamentals have remained intact as the stock has fallen, is catalyst enough and once the market begins to bring Comcast to more historically normal valuations it will trade in the low $20s.