Finance: No Trick Behind Comcast’s Cash Flow

Most people attending the NCTA convention in Atlanta will be focused on the bells (more than one kind) and whistles of broadband technology. But a battalion of influential stock analysts and money managers will spend much of their time with the top management of MSOs poring over income statements, balance sheets and competitive strategies. They might even spend a few minutes kidding The Wall Street Journal‘s March 19 headline "How Comcast Does Its Counting." The story suggested that by using what "accounting professionals would probably describe…as EBITDA (earnings before interest, taxes, depreciation and amortization)," Comcast was making $4.9 billion of traditional accounting cash flow look like $8.5 billion. The result, the WSJ concluded, was to make a stock trading at 11x look like one at a bargain-basement 7x. I can tell you that such complaints were made (by me) some 35 years ago. That’s when I learned broadcasters as well as cable operators were buying and selling properties based on the long-established real estate principle of "cash in vs. cash out." I wrote about it then, and do now, because it’s a smart way to do business and to value a business. The concept of EBITDA is rooted in the fact that different owners finance their operations with varying levels of debt, and pay widely disparate interest charges. The best way to understand any system’s ability to generate cash is to disregard the capital structure and focus on operating fundamentals. When a large MSO buys a smaller system, debt can be refinanced at more attractive interest rates. Sound boring? It was the very foundation of the rise of the average cable stock from a low price of $2 at the end of 1974, to $6,095 25 years later, unadjusted for splits. Media cash flow isn’t a trick, and is widely understood by the nation’s most prestigious financiers, who have loaned more money to media and telecom than any industry except real estate. Conventional earnings and free cash flow (after interest and taxes) are still popular valuation metrics. But Comcast, 30 years ago, had 42,000 subs and $2 million in annual cash flow. Today it has more than 21 million subs, better than $9 billion in cash flow, and it’s still growing by buying other people’s EBITDA. Analyst/investor Paul Kagan is chairman/CEO of PK Worldmedia, Inc. in Carmel, Calif. He owns Comcast shares. Information in his columns is not intended to be a recommendation to buy or sell securities.