Comcast Corporation (NASDAQ:CMCSA) is getting desperate. The financial media offered up a rose-colored look at the company’s April quarterly earnings report, but Comcast is losing vital pay TV subscribers, and it isn’t adding high-speed internet subscribers fast enough to make up the difference. CMCSA stock is in trouble.
I’ll say it again: Comcast is getting desperate. Its bidding war for Britain’s pay-TV group Sky and its rumored $60 billion rebid for Twenty-First Century Fox, Inc. (NASDAQ:FOX) are proof enough.
But let’s look at the media’s handling of Comcast’s recent quarterly earnings report. Comcast topped analysts earnings and revenue expectations, true. But subscriber growth in both internet and pay TV were down markedly.
Comcast saw internet subscriber growth fall nearly 12% year over year. But cord-cutting, a movement that is increasingly plaguing cable stocks, cost Comcast 96,000 pay TV subscribers on the quarter. The company talked up the fact that it added 375,000 high-speed internet subs, but only logged a total subscriber gain of 273,000.
In fact, the only reason CMCSA stock is afloat right now is NBCUniversal. Driven by one-time gains from the Winter Olympics and the Super Bowl, NBCUniversal was largely responsible for Comcast’s huge earnings and revenue numbers.
You can begin to see why Comcast desperately needs to acquire both Sky and Twenty-First Century Fox’s assets to stay competitive.
In the meantime, Comcast is buying back stock at a rapid pace to help provide some additional artificial lift for the shares. If at least one of these deals doesn’t go through, the situation will change very quickly.
Other Problems for Comcast
CMCSA stock is not only vulnerable from a fundamental perspective, it’s also vulnerable on the sentiment front. For instance, Thomson/First call reports that 30 of the 31 analysts following the shares rate them a “buy” or better. That lone holdout maintains a “hold” rating.
Click to Enlarge Additionally, the 12-month consensus price target for CMCSA stock rests at $45.65 — a near 50% premium to yesterday’s close. In short, Comcast is at risk of both downgrades and price target cuts if it doesn’t do something to make up for hemorrhaging pay-TV revenue.
Comcast options traders are beginning to see the writing on the wall, however. Currently, the July put/call open interest ratio rests at 0.90, with calls and puts in near parity. This reading is up significantly over the past month, as puts are added at a faster rate than calls.
That said, July implied volatility is on the low side. Implieds are pricing in only about a 3.5% move for CMCSA stock, with an upper bound at $31.68 and a lower near $29.50.
But volatility could spike significantly for Comcast heading into July. The fate of its Sky bid should be known by that point, as the courts should have ruled on the AT&T Inc. (NYSE:T) buyout of Time Warner Inc (NYSE:TWX). The latter, according to reports, could decide whether Comcast puts in another bid for Twenty-First Century Fox.
2 Trades for CMCSA Stock
Put Spread: I don’t see much changing for Comcast this year. Reports on the Sky bid look promising, but I predict that Walt Disney Co (NYSE:DIS) will win out on Fox, regardless of the court’s decision on AT&T. This still leaves Comcast relying on NBCUniversal for revenue as the cord cutting movement snowballs.
As such, CMCSA stock should continue to fall, following a slight rebound from current oversold levels. Traders looking to capitalize might want to consider a July $29.50/$30 bear put spread.
At last check, this spread was offered at 50 cents, or $50 per pair of contracts. Breakeven lies at $29.50, while a maximum profit of $2, or $200 per pair of contracts — a potential 300% return — is possible if CMCSA stock closes at or below $27.50 when July options expire.
Call Sell: If betting directly against Comcast stock isn’t your style, or if you own CMCSA and are looking to ditch the shares, you might consider entering a July $32.50 strike call sell position for 40 cents — $40 per contract — or better. Such a trade is especially useful if you already own Comcast stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $32.50.
A sold call allows you keep the premium as long as CMCSA stock closes below $32.50 at expiration. On the downside, if Comcast stock rallies above $32.50 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.