Comcast is a global media and tech company which is a member of the NASDAQ Exchange. It is the largest American multinational telecommunications conglomerate and has a strong market position, which has weathered the pandemic, war and unfavourable economic conditions relatively well. We believe CMCSA is currently undervalued on a relative value basis, and the stock will rise in the near future, hence our recommendation to buy long.
Current Price: $30.73
Target Price: $48.44
Stop: $24.78
Catalysts
We identify three major catalysts driving our recommendation as follows:
Dividends and Share Buybacks
Comcast operates with a diverse revenue stream, with several subsidiaries such as Xfinity, Universal and Sky Studios to name a few. This has allowed for strong returns for shareholders as of Q2 2022 despite challenges facing many companies with falling revenues.
Notably dividends in Q2 amounted to $1.2bn, with the payout ratio standing at 29.6%. Comcast stated in their forward guidance that their expected 5-year CAGR for the payout ratio is 12%, a strong position for shareholders of Comcast to be in. Earlier this year, annualised dividends per share increased 8%, and the Q2 results highlight the impact of this change. At the same time, the share buyback programme increased its authorisations, and is set to increase further. Share buybacks are a good sign for the stock price to increase, as it is reflective of a strong fundamental position the company stands on as it has the capacity to conduct this buyback.
Both of these combined suggests Comcast is in a healthy position, and shareholders can look to benefit from holding the stock in the near future.
Strong Market Positioning
By nature of the industry, most companies become natural monopolies due to the heavy set-up costs and maintenance costs required to operate a telecoms network. Indeed, Comcast's internet broadband footprint reaches 51% of American households. Traditionally there is little competition and little threat of competition due to the high barriers to entry. In particular, fixed-line internet service is received through one of two channels: cable or phone companies. Comcast sits in the cable category, and across nearly half of America, it is the provider of choice.
And to further this, Comcast has announced global expansion into the Nordic countries in September 2022 to add more customers to its expanding base. This global expansion will be in the form of SkyShowtime, a European streaming platform, with ambitions to roll it out in 17 more European countries in 2023. This market comprises of over 90m households, and so the potential growth prospects for Comcast are promising.
It is the diverse business range and strong market position combined that we believe will support the future growth of Comcast as a multinational conglomerate.
Fair Value
Finally, we believe there is value in Comcast, which has not been priced in on a relative value basis. The average P/E ratio over the last 10 years has been 18, but currently the forward P/E ratio stands at 9.9. We believe this is reflective of a discounted share price, given the current and future performance of the company is strong.
The stock has seen a fall over the past few months, with its 52-week low on 6 September 2022 at $35.61. However, while we note the stock fell 29.2% YTD (2022), when we compare this to a benchmark, the S&P 500 fell only 17.6% in the same period. We believe for the above reasons, and on a relative value basis, that Comcast has been skewed to the downside and has fallen more than justified by its value, and hence we believe there is potential for the stock price to rise to its fair value.
Risks
We identify a risk to Comcast's long position recommendation being the arrival of new competitors and a loss of customers. We note Comcast saw a fall of 10,000 net residential broadband consumers in Q2 2022, and this is likely due to growing competition from fixed wireless offerings by Verizon and T-Mobile. This would pose a threat to our Comcast position.
However, we do not see this as a significant risk for two reasons:
Despite the fall in customers, in the Q2 2022 results, Comcast adjusted EBITDA grew 10.1% Y/y, suggesting the diverse revenue stream offset the fall in customers on the broadband side. The nature of the conglomerate suggests rising competition in one field is not a significant concern, and has not affected the company.
Second, we note that the nature of the competition itself may not be as aggressive as currently feared. Verizon and T-Mobile are phone companies, and generally consumers prefer cable operated networks than phone. This is because it is faster, more reliable and offers customers more flexibility, all of which are highly valued.
Therefore, we do not believe the risk currently facing Comcast will amount to any significant reduction in the stock price, and so we recommend the long buy position on CMCSA.