Comcast investors have had good reason to wonder if they picked the wrong media stock. Walt Disney and Netflix are crushing it in video streaming. Charter Communications, its chief rival in cable TV, has focused on broadband while Comcast has been distracted by acquisitions at home and abroad.
While Comcast (ticker: CMCSA) is trading near an all-time high, the stock has badly trailed rivals. It’s up 28% in the past three years, versus gains of 50% to 100% for key rivals.
“Like a pet rock, Comcast stock just sits there,” wrote veteran telecom analyst Craig Moffett of MoffettNathanson in a recent note.
Yet Comcast’s stock could be a rock that starts to roll, as investors come to realize that Comcast’s diverse portfolio—including broadband, film studios, streaming, and theme parks—is well suited to a post-Covid-19 world.
As vaccines are distributed, attendance at Comcast’s Universal Studios theme parks should rebound, while ad revenues at NBC and sports-related networks should recover. Meanwhile, Comcast’s broadband service has never been more valuable, as quarantines taught consumers to rely on internet services for every facet of life. Comcast recently raised prices for 2021, reflecting the strength of its cable pipes.
“Businesses that are headwinds will start to become tailwinds,” says Comcast’s executive vice president and treasurer, Jason Armstrong. The company is expanding its theme park business in the coming year, including a Nintendo (7974.Japan) attraction in Japan and the opening of Universal Studios Beijing as part of a joint venture. The recovery in sports should lift advertising and pay-TV revenue, particularly in Europe, where Comcast owns the Sky satellite service.
Given Comcast’s conglomerate-like approach, the best way to value the business is using a sum-of-the-parts analysis, which values different segments to see if the pieces stack up to more than a stock’s market value. In fact, a sum-of-the-parts valuation implies that Comcast may be worth $63, a gain of 24% from the stock’s recent close of $51.
While there are no indications that Comcast plans to split itself up, the stock could benefit once investors take a deeper look. And, in a pricey market that has Disney (DIS) trading at sky-high multiples, Comcast could begin to attract more value-oriented investors.
Bank of America raised its price target on the Comcast shares to $62 this past week, saying it’s “ready to break out.” Trian Fund Management, controlled by Nelson Peltz, has taken a 0.3% stake worth $800 million.
Comcast has a dual-class structure, and CEO Brian Roberts controls a third of the voting power through ownership of all the Class B shares, making it tough to orchestrate a proxy fight. Nonetheless, Peltz could be a voice for management or operational changes. Comcast declined to comment on Peltz’s stake. “Trian believes Comcast’s stock is undervalued,” a Trian spokesperson said in a statement to Barron’s.
Roberts, who took over the business from his father in 1990, has been a serial acquirer, building Comcast into a vertically integrated cable and media empire. The backbone is cable TV and broadband. NBCUniversal, acquired from General Electric (GE) in 2011, brought broadcast and cable networks, Universal movie studios, and theme parks into the fold. Comcast tacked on DreamWorks Animation in 2016 and then outbid rivals for the British satellite service Sky, paying $50 billion, including the assumption of debt, in 2018.
Roberts had exceptional timing with NBC, buying when the network’s ratings were flagging and media assets were priced at a cyclical low. But Sky was the opposite. Comcast bought Sky “in the 11th year of a 10-year cycle at a nosebleed valuation,” says Moffett, “It’s a 1950s vision of the future, but instead of a broadcast TV antenna that’s 130 feet high, it’s a satellite 22,000 miles high.”
Sky’s subscriber base, including pay-TV and repackaged cable broadband, has stalled at 23.7 million customers. Revenue is expected to fall nearly 12% this year to $17 billion.
The financial drain has been substantial. In order to finance the Sky deal, Comcast added $48 billion in long-term debt to its balance sheet, taking it to $107 billion at the end of 2018; it will be down to an estimated $98 billion by year end. Sky’s operating profits, or earnings before interest, taxes, deprecation, and amortization, are down 34% since the acquisition.
Armstrong says the declines are due to the pandemic wiping out sports in Europe, where Sky owns rights to most Premier League soccer games, Formula One, and other major sporting content. English pubs paused subscriptions as soccer fizzled. “We’re convinced it’s temporary,” he says, noting that Sky retained 99% of its 13 million United Kingdom subscribers. The company has told investors that it’s confident it can double Sky’s Ebitda over the next several years.
Wall Street would still love to see Comcast dismantled—and it’s not just about Sky. “Comcast would be far more valuable if you separated NBC,” says veteran media analyst Richard Greenfield of LightShed Partners. “Investors would applaud Comcast being a stand-alone cable company.”
In a recent Bernstein poll of 39 large institutional investors, more than 80% said that Comcast should separate itself into cable and media assets.
Comcast Chief Financial Officer Michael Cavanagh says the company’s “media and technology businesses are working well together.” It has 56 million cable, satellite, and broadband subscribers, paying more than $100 a month, notes Armstrong. “We want to own the point of entry into the home, and we’ve put the resources into it,” he says.
Meanwhile, cord-cutting, long a bearish argument for the stock, may now be helping Comcast’s bottom line. The company is shedding TV subscribers as consumers cancel cable plans and switch to streaming apps, but reselling TV packages hasn’t been a high-margin business for a long time. Comcast continues to add broadband customers.
Sum of the Parts
Comcast could be undervalued by 20%.
- $291 B
Estimated market value of Comcast businesses
Bernstein analyst Peter Supino estimates that Comcast makes a gross profit of $36 on a $90 cable TV package; the profit margins for broadband-only plans are more than double that. The result is a more profitable overall cable business.
What does it all mean for the total value of Comcast? Supino estimates that the cable business should generate about $28 billion in Ebitda in 2022. Using a multiple of 10—a slight discount to rival Charter (CHTR)—the business would have an enterprise value (including debt) of $280 billion. For NBCUniversal’s media assets, Supino assigns an enterprise value of $57 billion, using a 7.5 multiple, while theme parks could be worth another $27 billion, based on 10 times Ebitda.
Sky is the most controversial slice of the Comcast pie. Supino values the business at $24 billion using a 7.5 times multiple, while other analysts see half that. It might not matter, though, given how much Comcast’s current value trails the sum-of-the-parts described above.
Supino estimates a total enterprise value of $366 billion, when taken together, along with some other small parts of the business. Adjusting for net debt and a year of cash flow, he comes up with a total equity value of $291 billion, or $63 a share. Valuing Sky at zero would still imply a $58 stock.
Either way, Comcast looks cheaper than Disney stock, which has soared in recent months as investors get increasingly excited about the company’s burgeoning streaming service, Disney+. NBC is far behind in streaming, but it has a promising start in a service called Peacock.
Launched in July, Peacock includes free and premium versions and has 26 million sign-ups. Comcast says it’s spending $20 billion a year on film and TV content that could wind up on Peacock. Comcast is also giving its broadband customers a set-top box called Flex to stream Peacock and other apps like Netflix (NFLX). The company says the offerings are improving loyalty to its Xfinity broadband service, while also generating ad revenue.
Peacock won’t be profitable or move the financial needle for Comcast for years. But it stakes out a beachhead for the company in streaming, and serves as a platform for NBC, Universal movies, and other content. Positive surprises for Peacock could give Comcast stock a significant lift. Disney shares jumped 14% earlier this month when Disney gave a bullish investor presentation about its streaming service.
There’s one more reason for the stock to get a boost: Comcast’s much-maligned acquisition spree could be forced to wind down since the U.S. media landscape is now highly consolidated. And Comcast is paying down debt to maintain its investment-grade credit rating.
The company could also resume share buybacks and lift its dividend—currently yielding 1.8%—as its debt load lightens. Comcast is forecast to generate $13 billion in free cash flow next year, giving it plenty of opportunity to reward shareholders who stick with the stock. Even critics of giant media conglomerates will have a tough time objecting to that kind of cash.
Write to Daren Fonda at [email protected]
