Comcast potentially provides a unique opportunity to invest in an excellent quality company at a very cheap price. This is due to Comcast’s leadership in providing fast cable internet and the significant price drop over the last year. Taken together, I would rate Comcast 4.5/5 stars for quality and 5/5 stars for valuation.

• Cable business provides essential high-speed internet services in an industry with limited competition due to high infrastructure costs
• Comcast is well positioned to provide higher internet speeds as the demand for faster internet increases
• Stake in Hulu has the potential to provide a significant cash infusion into the company

• Experiencing Slower subscriber growth and increased competition among internet providers
• Significant debt due to infrastructure costs and Sky acquisition (still lower debt than some competitors)

Business History and Overview:

Comcast (NASDAQ: CMCSA) is a global media and technology company that has managed and operated cable systems since 1963. Originally Comcast started as a small cable operator in Mississippi serving 12,000 customers. Since then, Comcast has expanded in part through strategic acquisitions, including acquiring AT&T broadband in 2002 and Sky in 2018. Comcast is now the largest American multinational telecommunication conglomerate and operates through the following business segments:

1) Cable communications: Provides broadband, video, wireless, voice and other services to US customers under that Xfinity brand.

2) NBCUniversal: Primarily consists 1) television and streaming services, 2) film and television studio production and 3) Universal theme parks.

3) Sky: Operations of Sky, one of Europe’s premier entertainment companies. Sky is involved with direct-to-consumer businesses including providing video, broadband, voice and wireless phone services.

Business Quality:

One of the strengths of Comcast is that the company has a long history of profitability. Over the last several years, Comcast has seen stable to moderate earnings growth across all of their businesses:

As we can see above, cable is by far Comcast’s most profitable business. Comcast cable offers high speed internet of over 1 gigabit per second to the majority of their network. Additionally, they are incorporating DOCSIS 4.0 technology to increase internet speeds to multi gigabits per second in the future. Comcast is also developing WI-Fi hotspots nationwide and is implementing a low-income broadband adoption program. Their high-speed internet has helped Comcast grow their subscribers by about 5% per year over the last several years.

NBCUniversal also has some well-known media products including USA network, E!, MSNBC, NFL/Olympic agreements and film studios. This segment also includes theme parks in Florida, California, Japan, China and a Universal’s Epic Universe theme park in development. Sky is Comcast’s last business division and is one of Europe’s leading entertainment companies. This segment services about 23 million subscribers with various video channels. Sky also services broadband and DSL as bundled services to certain European countries.

In terms of quality, I would rate the company as very high quality (4.5 out of 5 stars). Comcast has large and dependable cash flows from their primary businesses. The company also boasts excellent profitability as well as high return on equity compared to some of their peers. Comcast has increased their dividend for 14 years and focuses on dividend growth due to their low 30% payout ratio.

My main concern with Comcast is the large debt ($83.6 billion), though high debt is not unusual for telecommunication companies. In fact, both AT&T and Verizon Communications have about $150 billion in total debt, which is almost double Comcast’s debt. Despite this high debt, Comcast has an excellent credit rating of “A-” from FitchRatings. Comcast is also trying to sell its minority stake in Hulu for about $27.5 billion which can help repay some debt.

Valuation:

Comcast’s stock has undergone a major correction this year, with the stock price dropping about 33% since the start of the year. This has pushed the forward PE ratio down to under 10X, which is historically low for the company.

A large part of this price correction is due to the recent slower growth of broadband subscribers. However, I believe that broadband will continue to grow in profitability. My reasoning for this is below:

1) Internet access will likely not only remain critical for US customers, but also that the demand for faster internet will increase. Higher definition streaming, more demanding video games and increasing use of video calling will likely help drive this demand for faster internet.

2) Comcast is often one of the only fast internet providers for US customers and is well positioned with its DOCSIS 4.0 technology to meet future faster internet needs without significant infrastructure spending.

3) Comcast bundles TV packages, streaming services, Wi-Fi hotspots, calling plans and wireless services to help retain customers.

Based on this reasoning, I think a conservative estimate for subscriber growth is about 1% per year over the next five years. Over the last several years Comcast’s cable division’s earnings grew faster than subscribers, but let’s also assume that earnings from cable division will also grow at 1% per year. Let’s also assume that there will be no growth in Comcast’s NBCUniversal or Sky division.

Additionally, let’s also assume that Comcast will return somewhere between $5-6 billion in share repurchases each year at the current price over the next few years. This is significantly less than about $20 billion in share repurchases Comcast authorized in 2022. This hypothetical scenario would lead to about a 5% growth in earnings per share (EPS) (1% from the cable division and 4% from share repurchases), which has the potential to lead to excellent returns.

If these assumptions are correct, then at the current share price Comcast could have the potential to deliver a staggering 16% compounded return over the next five years. Interestingly, Yahoo finance currently predicts that Comcast is expected to have even higher long term growth, with their estimate being about 9% growth per year. Based on this analysis, my opinion is that Comcast should receive a 5 out 5 stars for valuation.

Risks:

Investing in Comcast does come with a number of potential risks. Some risks include that it is possible for the government to increase regulations on broadband providers which could limit Comcast’s future profitability. Other internet or cellular providers could also compete for internet subscribers. There is also a trend to “cut the cord” on TV subscription which could hurt Comcast’s revenue if enough consumers follow suit.

Comcast has also received criticism in the past for poor customer service, being anti-union and for spending significant amounts of money on lobbying. Although many of these criticisms have improved since Comcast was awarded “The Worst Company in America” from the Consumerist, future issues could degrade the reputation of the company which can adversely affect their businesses.

Final Thoughts:

The recent negative sentiment toward Comcast has created what I believe is a buying opportunity for Comcast. Based on my growth estimate, Comcast has the potential for some strong returns. In fact, at the current price it could be argued that investors are purchasing the cable business cheaply and receiving the remaining businesses for free.

I also believe the dependability of Comcast’s primary business, the safety of the dividend and the opportunity for Comcast to sell its stake in Hulu to Disney for at least $27.5 billion makes Comcast a financially stable and high-quality company.

From my perspective, I think it is relatively challenging to find a high-quality company at a great price. I think that Comcast may qualify as one such company that meets both criteria. Thus, for my portfolio, I plan to continue to strongly build my Comcast position under $37.50 and may to continue to add to my Comcast position under $42.

Disclaimer:

I currently own stocks mentioned in this article including Comcast stock at the time of writing this post. I am not a financial advisor and I am not providing financial advice. I am sharing my thoughts and processes of selecting stocks for my personal portfolio for fun and entertainment purposes only.

All information provided here is on a “best of my knowledge” basis and may be incorrect. All estimates and models are guesses and may not be accurate. Stocks mentioned here may have additional risks not covered in the post.

Investing in the stock market comes with serious risk of losing money, please consult a professional financial advisor and do due diligence before investing.