Comcast: A Fair Deal

by The Compound Investor

Comcast (CMCSA) stock strikes me as good value right now. Its shares change hands for around $39.85 each, which works out to circa 17x estimated FY20 profit of $2.33 per share. Out to FY21, that valuation drops to 13.5x forward earnings. That figure is based on FY21 profit estimates of $2.93 per share as operations recover from COVID-19. Call me crazy, but a 7.5% forward earnings yield looks pretty good to me in the current interest rate environment.

If I had to explain that, I’d probably cite a handful things. Firstly, I think a lot of folks associate Comcast with cable-TV. Given the rise of over-the-top streaming services, it does seem like cable’s best days are behind it. Secondly, it carries $100,000m in debt following the acquisition of British satellite-TV company Sky. Thirdly, some folks see political risks here. I recall former White House candidate Bernie Sanders taking aim at the firm not so long ago.

In fairness to Comcast, none of those issues have prevented it being a great growth stock in recent years. I have compound annual profit growth in the 16% region over the past ten years. Its stock is up by a factor of four in that time. For that reason, I am surprised Comcast shares have not commanded a higher valuation, but that’s what makes a market I suppose.

Cable-TV

I won’t dwell on debt and politics. The latter is too speculative, while the company generates enough retained profit to deal with the former. Let’s grapple with Comcast’s cable-TV business instead. A quick glance at the firm’s most recent 10-K shows that the Cable Communications segment generated circa $23,600m in annual EBITDA. That was relative to company-wide total EBITDA of $34,258m. That sounds like a lot, but the Cable Communications segment also includes high-speed internet and business services. In fact, video margins are not particularly high here. Net of programming costs, it brought in under $9,000m last year.

That’s why cord-cutting fears, though legitimate, often strike me as disproportionate here. The high-speed internet unit is also growing at a nice clip. Comcast sported 25.8m high-speed internet customers back in FY17. That had grown to 29.1m as of the first quarter of FY20. Indeed, it seems likely to me that cord-cutting actually compliments the internet business. Want to stream Netflix or even live sport in UHD? Yeah, you’ll need good internet speeds for that. This is reliable, recurring and high-margin revenue. And it’s growing at a good clip too.

Other segments strike me as stodgy, though they will suffer a temporary hit from COVID-19. Its Sky business will suffer due to the loss of live sports, though the PGA Tour, English Premier League, Formula 1 and international cricket are all back now. The NBA is set for a return very soon I believe. That just about covers its most important offerings. As a Sky customer in the UK, I saw pretty big reductions to my monthly bill between March and June. Advertising must have taken a big hit too. Likewise, NBCUniversal will suffer from lower advertising revenue, not to mention theatrical release delays and theme park closures.

Valuation

Despite the above, we can still expect a ton of profit this year as mentioned in the introduction. The $2.33 per share figure pencilled in by analysts works out to roughly $10,750m in gross terms. The per-share dividend – worth 92¢ in annualized terms – takes up around $4,250m of that. So, in the year of the COVID-19 depression, Comcast should still generate over $4,000m in retained profit. By the end of FY21, that figure should rise to well over $9,000m. For that reason I don’t see debt as being too much of an issue. It has ample room to deleverage over the next few years.

Here’s why I fancy the stock to do well. At 13.5x estimated FY21 earnings there is very little downside risk from the valuation. Analysts also expect more profit growth going forward. The handful of analysts with FY24 estimates see earnings coming in at around four bucks per share. At, say, 15x earnings, that equates to a $60 stock price. Throw in circa $4.25 per share worth of cumulative dividend cash into the mix, and you would be looking at low-teens annual returns in the medium-term. That strikes me as a fair deal right now.

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