There’s a case to be made for Comcast Corporation (NASDAQ:CMCSA) stock. Notably, Comcast stock is cheap, trading at barely 18x 2018 EPS estimates. And yet Comcast stock traditionally has been a solid grower, with adjusted EPS growing 7% last year and forecast to grow an impressive 18% this year.
The Comcast business also has a reasonable amount of diversification, with roughly 30% of profit coming from outside the communications business.
The NBCUniversal entertainment unit might seem at risk in a media landscape increasingly dominated by streaming services like Netflix, Inc. (NASDAQ:NFLX), Hulu, and Amazon.com, Inc. (NASDAQ:AMZN). But it, too, is growing, with revenue excluding the impact of the Olympics up a solid 12.5% through the first three quarters of 2017.
Meanwhile, Comcast’s balance sheet is in good shape, with net debt at 2.2x trailing twelve-month Adjusted EBITDA. That compares to a 3x+ figure at AT&T Inc. (NYSE:T), assuming its purchase of Time Warner Inc (NYSE:TWX) passes regulatory muster. AT&T goal in that deal, of course, is to build exactly what Comcast already has: a union of content and distribution.
The problem with that analysis, however, is that it looks backward, not forward. And that’s a good way for investors to get into trouble. Looking forward, Comcast likely will be challenged across the board. Given those challenges, the valuation of Comcast stock is far less attractive than it might initially appear.
Diversified Profits and Comcast Stock
While the majority of Comcast’s profits come from video and high-speed internet subscriptions, the company’s NBCUniversal unit does provide some level of diversification. Through the first three quarters of the year, the share of profit (excluding corporate expense) by business breaks down as follows:
- Cable Communications: 69.5%
- Cable Networks: 13.6%
- Broadcast TV: 4.7%
- Filmed Entertainment: 4.6%
- Theme Parks: 7.6%
The problem, however, is that none of these categories look particularly attractive at the moment, with the possible exception of the theme park business.
The Cable Business
Cord-cutting is hitting video subscribers. Guidance for increased subscriber losses tanked Comcast stock ahead of its Q3 report, and a net loss of 125,000 subscribers in the quarter was squarely within the projected range. Comcast stock has rallied – but still hasn’t re-traced all of that post-earnings declines.
Obviously, Comcast’s high-speed Internet business mitigates some of those losses. Cord-cutters (and my household is a Comcast cord-cutter) not only will keep their Internet service, but often upgrade to support streaming demands.
Indeed, despite video losses, the total number of residential Comcast customers increased Y/Y in Q3. And a nascent effort to move into the home security space is showing early promise, with customer count rising 32% in the third quarter to clear 1 million.
All told, there might be enough for Comcast to eke out some growth in this business, even if overall subscriber numbers stagnate. Comcast should be able to take pricing in most markets, since its service usually is the fastest.
But longer-term, the 5G rollout could undercut the Internet subscriber business as well. And even though Comcast might not lose a cord-cutting subscriber entirely, it does see a revenue loss. At a certain point, those losses are going to pile up.
NBCUniversal
Meanwhile, the NBCUniversal business looks outright dangerous. Even after the deal between Walt Disney Co (NYSE:DIS) and Twenty-First Century Fox Inc (NASDAQ:FOX,NASDAQ:FOXA), content assets are cheap.
Share prices of cable network operators like Discovery Communications Inc. (NASDAQ:DISCA) and AMC Networks Inc (NASDAQ:AMCX) have fallen sharply from their highs, and trade at a discount to the overall multiple of Comcast stock.
NBCUniversal’s news channel MSNBC might be more valuable than filmed-content operators, but CNBC is in a multi-year ratings decline and properties like USA Network and E! aren’t immune to their own cord-cutting challenges. So-called re-transmission fees have driven growth in that space, but those, too, will be offset by subscriber declines.
The Filmed Entertainment business has driven much of this year’s profit growth, thanks to Despicable Me 3. But that business is notoriously lumpy. The Universal theme parks business is attractive, but represents less than 8% of total profit.
There’s just not enough strength outside of the distribution business to really change the case for Comcast stock. Indeed, across the board, cord-cutting challenges are building.
CMCSA Stock Isn’t Cheap Enough
In that context, Comcast’s earnings and cash flow multiples just don’t look particularly attractive. Nor does a 1.6% dividend yield, even with double-digit growth (again, looking backwards – those increases will slow as earnings and cash flow growth does).
On an EV/EBITDA basis, Comcast stock is much cheaper than smaller peer Charter Communications Inc (NASDAQ:CHTR), trading at under 9x versus 11x for CHTR. But Charter has been the target of intense M&A speculation, and doesn’t have what looks like an earnings drag coming from content assets.
There are worse stocks to own than CMCSA, to be sure. Cost-cutting and price increases probably can drive some level of earnings growth going forward. But it’s a narrow path to that growth, and any acceleration in cord-cutting could lead to another post-earnings drop as seen coming out of Q2.
Simply put, the trends are moving against Comcast. And while the company has some weapons to battle those trends, it doesn’t have enough. At a low- to mid-teen EPS multiple, CMCSA stock probably is worth a flyer. At 19x, however, the stock already is pricing in as much growth as the company will be able to muster – at best.
As of this writing, Vince Martin has no positions in any securities mentioned.
