Text size

Review | Preview

Comcast’s decision to pull out of its high-profile bid for Time Warner Cable would seem to be the coda to a very bad year for Comcast. The country’s largest cable provider has been hit with new government regulations, a raft of young customers pulling the plug on cable TV, and, now, the failure of a $45 billion bid for its peer. Customers, who rightly complain about cable’s monopolistic tendencies, are thrilled.

Comcast CEO Brian Roberts

But it’s actually Comcast (ticker: CMCSA) shareholders who should be happiest. Despite a slew of bad news, Comcast shares finished the week at $59.64, just off their all-time high. Time Warner Cable (TWC) would have added beneficial scale to Comcast, but it was never an essential ingredient.

It has been nearly two years since Barron’s endorsed Comcast shares in a cover story on the changing landscape of television (“Don’t Touch That Dial,” Aug. 5, 2013). Since then, the stock is up 31% versus 24% for the Standard & Poor’s 500.

Comcast didn’t willingly give up on Time Warner Cable. It was government resistance that doomed the merger. But Comcast had braced for the possibility, never agreeing to a breakup fee. (The failure of large deals often carries large penalties for would-be acquirers.) And suddenly the cable giant gets to enjoy the single life. Speaking to CNBC on Friday, Comcast CEO Brian Roberts said, “This allows us to think again.”

Smaller acquisitions may be on the table in the coming years, though Comcast will more likely spend its money in ways that could immediately benefit shareholders. “The deal was going to slightly increase our leverage,” Roberts told CNBC, part of Comcast-owned NBCUniversal. “That’s now not happening, so that opens up room for further stock buybacks. And I think that’s an area that certainly we’re open to thinking about and talking about with the board.”

OVER EACH of the past six years, Comcast has bought back an average of $2.2 billion worth of stock, and the company had already planned to repurchase some $4.25 billion worth in 2015, roughly 3% of its market value. With the Time Warner deal scotched, Comcast’s buybacks could hit $10 billion, a figure that has been pre-approved by the board of directors. That alone would boost earnings per share by 7%. Comcast has already bumped its dividend by 11% this year, giving the stock a yield of 1.7%.

Given Roberts’ upbeat comments on Friday, there could be good news in store for the stock as soon as May 4, when Comcast reports first-quarter results.

As for Time Warner Cable, for months the stock had traded below Comcast’s offer price, as investors grew less optimistic about the deal. Now, the country’s No. 2 cable provider is likely to be snapped up by someone else, most likely Charter Communications (CHTR), cable’s No. 4 player, backed by industry pioneer John Malone. Charter was targeting Time Warner Cable before Comcast made its surprising bid. Any new offer would likely require a 10% premium to Friday’s close of $155.26.

Cablevision Systems (CVC) could also be in play. Shares of the New York–based cable operator are up 9% since it became clear that the Comcast deal wouldn’t go forward. Cablevision has tough competition in the New York metropolitan area, mainly from Verizon Communications (VZ). But Cablevision would give Comcast some of the New York exposure it had sought from Time Warner Cable. With just 2.7 million subscribers, Cablevision is a quarter the size of Time Warner Cable, making it more likely to pass regulatory muster.

For cable investors, it’s a whole new ballgame.

--Alexander Eule

Raising the Roof on Home Depot Shares

Home Depot has spruced up nicely since our positive cover story just over a year ago (“Sunny Skies Over Home Depot,” April 21). The stock has rallied 48% since then, to a recent $113.70, and tacked on 25% since we reiterated our bullish view four months later (“Results Build a Strong Case for Home Depot,” Aug. 25).

Even so, the company’s run doesn’t seem to be over. A strengthening housing market, rising renovation demand, and the company’s focus on the lucrative professional and high-end markets could propel the shares further in the year ahead. The stock could rise to $124 on “several multiyear sales drivers,” Piper Jaffray analyst Peter Keith predicts, giving investors a return of more than 10% after taking into account a dividend yield of 2.1%.

Home Depot (ticker: HD) has a history of issuing conservative guidance and then clobbering expectations. In November, the company projected fiscal-2015 earnings per share of $4.54 and ended up reporting $4.71 for the year ended on Jan. 31. Same-store sales rose 5.3%, well ahead of the 4.6% growth executives had projected.

This year could be no different. The retailer forecast ho-hum earnings growth of 8.5% to 10%. Even a mild resurgence in new construction, and higher spending on remodeling, could result in stronger results.

Home Depot shares trade for 22 times current fiscal year estimates of $5.22, a premium to similar retailers. But the company’s fundamentals, an attractive economic backdrop, and management’s habit of returning cash to shareholders justify the higher valuation. Home Depot bought back $7 billion of its shares last year, and has a new $18 billion repurchase authorization.

U.S. construction remains well below normal levels, with housing starts rising to one million in 2014, versus a historical average of about 1.5 million new units a year. Even if the market takes a couple more years to hit those numbers, Home Depot should benefit from the growth.

--Avi Salzman