A Clear "Sky" Ahead for Comcast

10/10/2019 5:00 am EST


Ben Reynolds

CEO, Sure Dividend

Comcast Corporation (CMCSA) is a media, communications, and entertainment conglomerate. Its operating segments include Cable Communications, NBCUniversal, Theme Parks, Broadcast TV, and Sky, observes Ben Reynolds, editor of Sure Dividend.

Collectively, through these segments, Comcast competes in a wide variety of businesses in the U.S. and Europe, including high-speed internet, video, voice, wireless service, cable networks, filmed TV, and others. Comcast was founded in 1963, has $109 billion in annual revenue, and trades for a market capitalization of $200 billion.

Comcast reported second-quarter earnings on July 25th, 2019, and results were strong. The Sky acquisition from late 2018 helped boost the top line by 24% year-over-year.

However, organic revenue was strong as well for most of the company’s segments. Particular strength was seen in Cable Communications and Theme Parks. Filmed Entertainment was the notable weak spot during Q2.

Earnings-per-share came in 13% higher on an adjusted basis in Q2, rising to $0.78. Adjusted EBITDA rose 17.5% against last year’s Q2 as Comcast saw acquisition and other costs weigh on margins. Our estimate for this year is for $2.80 in earnings-per-share after robust Q2 results.

Comcast has a meaningful advantage in that it is one of the largest operators in the entertainment industry. In addition, its revenue streams are highly diversified, so it can weather downturns in one or more of its segments without undue stress on its financials.

It should be noted that Comcast is susceptible to the cord-cutting trend wherein consumers opt for streaming services, or no TV service at all, in lieu of traditional cable services, where Comcast has exposure.

We see Comcast’s recession resistance as strong given that it actually grew its earnings-per-share during the last financial crisis. As its revenue mix has shifted around since then, the company may not achieve the same result during the next downturn. Still, we see Comcast as a non-cyclical business.

We expect Comcast to grow earnings-per-share at a rate of 10% annually in the coming years. This is a material slowdown from the past decade, which saw 17% annual growth, on average. Comcast will see this growth from its high-speed internet business, strong programming revenue, and the Sky acquisition, all of which have performed well in recent periods.

The stock trades for a price-to-earnings ratio of 15.7 based on expected earnings-per-share of $2.80 for this year. Our fair value estimate for the stock is a price-to-earnings ratio of 17.5, so the stock is somewhat undervalued after a recent rally has boosted the price-to-earnings ratio.

Still, valuation changes could add 2.1% per year to shareholder returns. In addition, we expect Comcast to grow earnings-per-share by 10.0% per year. Adding in the 1.9% dividend yield, total expected returns could be near 14% per year over the next five years.

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