Comcast: Excellent Bear Market Buy, Here’s Why (NASDAQ:CMCSA)

Comcast: Excellent Bear Market Buy, Here’s Why (NASDAQ:CMCSA)


Cindy Ord

Bear market sell-offs are a gift for dividend value investors, as it gives them the opportunity to deploy fresh dry powder on bargain valued stocks. Studies have shown that getting a great starting valuation is one of the most important factors to compounding returns over the long run.

This brings me to Comcast (NASDAQ:CMCSA), which is now trading in what I see as deep value territory after the recent sell-off. In this article, I highlight what makes CMCSA a strong buy for potentially market-beating returns, so let’s get started.

Why CMCSA?

Comcast is a global media and technology company that provides broadband and streaming services to 57 million customers across the U.S. and Europe. Its broadband, wireless, and video services include Xfinity, Comcast Business and Sky Brands, and its media empire includes Universal, Sky Studios, NBC, Telemundo, and Peacock streaming.

Comcast has a moat-worthy collection of assets, not least of which is its internet broadband footprint that reaches 51% of American households. This, combined with limited competition gives it durable advantages, as noted by Morningstar below:

We believe Comcast possesses a wide moat, resulting from the strength of its core cable business. The majority of U.S. homes today can receive fixed-line internet access service from only two providers: the traditional cable or phone company. Across nearly half of the U.S., that cable company is Comcast. The cost to enter this market is enormous.

While technological developments have made it possible to build more efficient and reliable networks than legacy providers possess, deploying these technologies still requires heavy construction spending, while also overcoming the regulatory hurdles that municipalities often impose. Assuming successful network construction, entrants then face steep customer acquisition costs and startup losses as they attempt to gain share, typically with a modestly differentiated product in a rapidly maturing market.

This has enabled comcast to enjoy strong profitability. As shown below, it scores an A+ profitability grade with leading EBITDA margin and return on equity of 30% and 15%, respectively.

cmcsa stock

CMCSA Profitability (Seeking Alpha)

Much attention has been focused on the loss of 10,000 net residential broad band customers during the second quarter, while in prior years’ second quarters, CMCSA has averaged 185,000 net customer additions. This is an indication of maturing growth, but has also raised concerns of growing competition from fixed wireless offerings from T-Mobile (TMUS) and Verizon (VZ).

However, I believe these concerns are overblown, as home broadband customers utilize far more network capacity than phone users, taking up more of telecoms’ bandwidth. As such, fixed wireless growth may not be as aggressive as some investors fear, as the wireless providers may not want to sacrifice network quality over growth in this market.

Meanwhile, CMCSA has demonstrated strong adjusted EBITDA growth of 10.1% YoY to $9.8 billion in the second quarter, despite the net loss in residential broadband customers. Moreover, CMCSA is growing its wireless business (through a wholesale agreement with Verizon), adding 317,000 customers, and NBCUniversal grew its adjusted EBITDA by 19.5% to $1.9 billion.

These factors enabled robust shareholder returns, including $1.2 billion in dividend payments and $3 billion in share repurchases during Q2 alone. I see potential for continued strong capital returns to shareholders through Comcast’s diverse revenue streams, as noted below during the recent conference call:

We’re returning a record amount of capital to shareholders and our balance sheet is in a great place. We have also continued to invest in strategically important growth opportunities, including enhancing our world class broadband network, scaling Xfinity mobile, increasing our capabilities at Business Services, launching Peacock, completing Universal Beijing and starting construction at Epic, just to name a few. With substantial cash flow generation and a strong foundation for innovation, Comcast is in a wonderful position.

Meanwhile, Comcast sports a strong A- rated balance sheet and currently yields 3.02%. The dividend is very safe with a 29.6% payout ratio and comes with a respectable 5-year CAGR of 12%. Applying the rule of 72, the yield on cost will double every 6 years.

CMCSA also screams cheap at the current price of $35.76 with a forward PE of 9.9, sitting materially below its normal PE of 18 over the past 10 years. Analysts estimate 8% to 12% annual EPS growth over the next 2 years, and have a consensus Buy rating with an average price target of $48.68. This translates to a potential one-year 39% total return including dividends.

cmcsa stock

CMCSA Valuation (FAST Graphs)

Investor Takeaway

Comcast is a great company with numerous competitive advantages, including its size, market penetration, and scale. It has been a cash cow for shareholders, returning billions of dollars through share repurchases and dividends.

It appears that growth investors have bailed on the stock while value investors have yet to make up their mind. Meanwhile, CMCSA can return significant value to its shareholders, even in a no-growth scenario, simply by repurchasing its shares at the current heavily discounted price. As such, I view CMCSA as being a strong buy for its deep value, capital returns, and moat-worthy assets.



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September 4, 2022 / Markets / Tags: , , , ,

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