Comcast (CMCSA) stock has not had a great year, down 0.6%, and is not on too many people’s radar as a top stock for 2016.
However, with one major catalyst ahead, CMCSA is a surprising must buy for 2016.
Comcast Is Not What You Think
Comcast is known as a media company to the average investor — actually, people believe it is predominantly a cable company, which has worked against Comcast stock in recent memory due to the ongoing rise in cord cutters.
However, CMCSA is much more than cable TV.
Over the last few years CMCSA has transitioned from media/cable to broadband Internet service provider. Back in the first quarter of this year, after CMCSA added 400,000 broadband customers, its broadband business became just as large as its TV business, with 22 million subscribers each.
Six months later, there is no question that Comcast’s broadband business is far larger than video. Most recently, CMCSA had its best third quarter in six years, adding 320,000 new broadband subscribers.
What CMCSA Is Doing in Broadband
That said, Comcast’s broadband business is changing rapidly, and is well positioned for significant market share gains in 2016.
As most know, high-speed broadband Internet services is the new norm within the industry, and Comcast offers speeds from one to two gigabits per second. While CMCSA has already begun to roll out its 2 Gbps service, the company just recently announced that the first customer using 1 Gbps speeds has been set up in Philadelphia.
Nevertheless, CMCSA is rolling out its Gbps services faster than any of its competitors. CMCSA was late to enter the space, but because it is using a new technology called DOCSIS 3.1, Comcast can essentially make minor adjustments to its existing fiber coaxial to upgrade download speeds by 10, 50 even 100 times.
Furthermore, while competing services like AT&T‘s (T) GigaPower and Alphabet‘s (GOOG, GOOGL) Fiber have mostly targeted small-to-medium-sized cities for high speed broadband services, CMCSA has rolled out its services in some of the largest U.S. markets, like Atlanta and the San Francisco bay area.
In total, CMCSA is targeting 18 million potential customers with its new Gbps broadband services.
Why Broadband Matters for CMCSA in 2016
In total, CMCSA controls about 25% of the broadband Internet space, but with 18 million eligible for these faster speeds, and no legitimate competitor in these markets, Comcast looks poised for ongoing subscriber growth, having more record quarters ahead.
This is great news for Comcast stock because higher content costs in video has caused recent margin pressure. Therefore, if CMCSA can create accelerated broadband subscriber growth, it should lead to strong revenue and profits in 2016.
Beyond that, there are countless other projects on the table, like wireless services as a mobile virtual network operator and the potential for a Sprint (S) or T-Mobile (TMUS) merger.
The Pieces Are in Place for Comcast Stock
With that said, there may be underlying catalysts for Comcast stock in 2016, but there’s no doubt that broadband will determine CMCSA’s fate. For investors, that is a good thing, as is the fact that CMCSA management returns upward of 80% of its free cash flow to shareholders.
While Comcast stock’s 1.75% dividend yield is nothing to celebrate, its share repurchases are. CMCSA has reduced its share count by 10.8% over the last five years. As a result, its stock price has outperformed its market capitalization growth by 159% versus 130% during the same five years.
Thus, Comcast’s effective share repurchase plan has created value for shareholders, and if profits soar from higher broadband subscriber growth, investors can rest assured that buybacks will play a role in the Comcast stock story for 2016.
Nonetheless, Comcast stock has all the pieces in place to have a very good year ahead. It has a major growth catalyst with broadband, a cheap valuation at just 16 times free cash flow and a management team that will help support the stock price via buybacks.
Collectively, there is a lot to like about CMCSA in 2016.
As of this writing, Brian Nichols does not own CMCSA stock, but may initiate a long position within the next 72 hours.
