Comcast (CMCSA) stock strikes me as reasonably priced right now in a world where blue chip value is hard to find. As it stands, shares in the Philly-based media/cable giant trade for around $42.20 apiece. I make that equivalent to a price-to-earnings ratio of circa 13.5 on the basis that net profit is expected to come in around the $3.10 per share mark this year. To provide some additional context to that figure analysts see growth coming at around 11% next year. In other words, there is a decent chance that Comcast stock will trade under 12.5x earnings in 2020, all other things being equal.
So what gives here? A solid blue chip stock going for around 12x forward earnings in this market seems odd. Doubly so given Comcast has grown net income at a double-digit clip over the past decade. My gut instinct says three things, which I will address in turn below.
What’s Holding Comcast Back?
First, the absolute level of debt looks pretty high here. As it stood at the end of 3Q19 Comcast had total debt of circa $97,000m net of cash, primarily a result of the acquisition of UK media and pay-TV company Sky. Put another way the net debt load here is equivalent to an extra $21 per share on top of the $42.20 stock price I quoted above. On that basis the 13.5x price-to-earnings ratio quoted above moves to around 20 in debt-adjusted terms. Needless to say that looks quite a lot less cheap, though still reasonable given double-digit profit growth.
Second, some commentators worry about the company’s cable TV business. In the era of Netflix and streaming, you have to wonder how long the legacy pay-TV models will hold up. Why pay $100 per month on cable when Netflix only sets you back a fraction of that? Even if you threw in Disney+ and another streaming service you’d be looking at huge savings in terms of monthly outgoings. For folks who don’t need live sports this is increasingly becoming a no-brainer.
Third, there is some concern that politicians will crack open the internet service provider market on antitrust grounds. Presidential candidate Bernie Sanders, for instance, recently unveiled a plan that would challenge service providers in the United States. Profit margins in Comcast’s Cable Communications segment (which houses 28 million high-speed internet customers) would surely take a hit. The same plan would also ban service providers from owning media content. Given Comcast owns NBCUniversal, one of the biggest media companies on Earth, its business would surely be broken up under those particular proposals.
Debt, Cord Cutting
I’ll address each of these three points in turn, starting with the debt load. Nearly $100,000m in reported net debt is a large figure, no doubt about that. On the flip side Comcast is also a massive cash generating machine. Over the first nine months of the year it generated circa $25,800m in earnings before interest, taxes, depreciation and amortization (EBITDA). Free cash flow clocked in at a shade under $11,000m. By my count the business should pump out around $10,000m in excess cash this year after meeting its dividend commitments. In other words the company has ample room to reduce debt at a healthy rate.
The second point also looks valid at first glance. In 3Q19 the company reported a net loss of just over 220,000 residential cable-TV subscribers in the United States compared to 3Q18. That was the tenth quarter in a row of net residential video customer losses and left Comcast with around 20.4 million residential cable customers in the US. By way of comparison the company had a million more domestic cable-TV customers just two years ago.
Needless to say that is having an impact on overall group finances. By the end of 3Q19 Comcast had generated circa $16,700m from its cable-TV operations in the United States. Back in 2017 the comparable figure was $17,400m. Over in Europe, the situation looks similar with Sky. The satellite-TV company lost around 99,000 customers in 3Q19.
The good news is that the company is making this up elsewhere. For instance, its high speed internet business had posted revenue of $13,900m by the end of 3Q19. The comparable figure at the same point in 2017 was $11,000m. Indeed given the internet usage requirements for streaming content you could even argue that folks dumping cable-TV en masse would, at worst, be neutral for Comcast’s overall business.
Break Up Fears
That leaves point three, the antitrust issues. On that particular issue I’d offer two counter points. First, it’s worth bearing in mind that Comcast’s business is pretty diverse. I’ve barely even mentioned the assets inside its NBCUniversal subsidiary. Those include its theme parks, which pulled in around $1,800m in EBITDA over the first nine months of 2019; the film studio – which house franchises such as the Jurassic Park film series; and cable networks such as Golf Channel, CNBC and MSNBC. The cable networks alone generated circa $3,400m in EBITDA over the first nine months of 2019 from affiliate fees and advertising.
The second counter point is a note from history. Forced break-ups, though not sounding particularly welcome, don’t necessarily work out badly in the long run. Imagine your ancestor owning the original Standard Oil monopoly back when it was broken up in 1911. Assuming the resultant companies were passed on you would own the likes of Exxon Mobil, Chevron and BP today. A more recent example would be the Bell System, owned by AT&T until its breakup in the early 1980s. Holding the resultant “Baby Bells” up to the present day would give you ownership of assets such as the modern day AT&T (which itself now includes the likes of Warner Media and DirecTV) and Verizon, amongst others.
On that basis, I’m not overly concerned. At the stock’s current earnings yield of circa 8% (25% of which is paid out as cash dividends) and earnings growth estimates of 10%, it does not seem a stretch to imagine Comcast returning double-digit annual returns here on out.
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Disclosure: I own shares of Comcast via the company sponsored dividend reinvestment program.