Cable operator and telecommunications firm Comcast (Nasdaq: CMCSK) reported strong operating cash flow but a net loss for the fourth quarter.
The Philadelphia-based company reported a net loss of $167.6 million, or $0.23 per diluted share, for the fourth quarter, down from a profit of $432.8 million, or $0.58 per diluted share, a year ago.
Fourth-quarter revenues grew 27% to $1.8 billion, up from $1.4 billion a year ago, and operating cash flow (earnings before interest, taxes, depreciation, and amortization, or EBITDA) grew 27% as well to $533.7 million, from $421.3 million a year ago.
As the country's third-largest cable operator, investors are focused primarily on two areas of Comcast's growth: digital cable subscribers and Internet customers. These are the areas expected to ignite the company's cash flow, and Comcast made a strong showing in both segments.
The company added 160,000 digital subscribers in the fourth quarter and finished the year with 515,000, up from about 80,000 at the beginning of last year. On the Internet access front, Comcast signed up about 30,000 subscribers in the fourth quarter and now has 142,000 in 14 markets. Investors should focus closely on these figures going forward.
By comparison, at the end of the fourth quarter Time Warner(NYSE: TWX), the country's second-largest cable company, had 430,000 digital subscribers and about 550,000 Internet subscribers.
Though upgrading networks from analog to digital required millions of dollars of investment, analysts expect a high return on capital. Merrill Lynch, for example, said in a recent report that Comcast charges its digital subscribers an extra $15 per month, and yields an $11 profit on the incremental income.
Analysts and company officials use EBITDA to measure a capital-intensive company's earnings power since it omits depreciation, amortization, interest, and taxes. Why omit these charges? To get a sense how fast the company's core business is growing.
If you do factor in debt, however, Comcast stands tall next to its competitors. Its long-term debt-to-equity ratio stands at a respectable 0.84, compared to Time Warner's 2.03. Though its debt load vaulted 59% to $8.7 billion last year, from $5.5 billion in 1998, the company is generating plenty of cash flow to cover its interest payments. Its interest coverage ratio stands at 3.5 times. As more subscribers switch to digital and sign up for Internet access services, and capital expenses taper off a bit, analysts expect Comcast's operating cash flow to skyrocket.
Still, the critical measure for investors when it comes to debt is cost of capital. This concept asks a very simple economic question: Is the company making money above its costs, including the cost of debt and equity? According to figures gleaned from a recent Fortune magazine story, Comcast's cost of capital for 1998 (the latest available) was 9.3% while its return on capital was 3.8%.
It's reasonable to assume that Comcast's return on capital will accelerate sharply as it adds digital and Internet subscribers, but it might be smart to wait for proof this is happening before moving forward.
See Also
