Comcast Corporation (NASDAQ:CMCSA) reported great earnings last week. The stock market rewarded Comcast stock by dropping it to new 52-week lows. Now Mr. Market doesn’t always react to news how you’d expect. Even still, this is a pretty unusual reaction.
Comcast beat on earnings, it beat on revenues, and showed excellent year-over-year growth. So what’s the catch? There are several things on investors’ minds. For one, much of the earnings came from special events, such as broadcasting the Olympics. And Comcast is also engaged in a bidding war for a large British cable company that has investors nervous. And a disappointing earnings release at Charter Communications Inc (NASDAQ:CHTR) sent the whole cable sector lower.
Overall, though, the odds point to Comcast stock recovering in coming weeks. Let’s dive in to what happened with earnings.
One Catch for Comcast’s Great Earnings
Comcast put in what appears to be a massive blowout earnings quarter. And no disrespect to management — they did a great job. But the NBCUniversal segment was largely responsible for the huge numbers and it did so in part due to one-off events.
NBCUniversal reported 21% growth in cable revenues for the quarter, for example. But $300 million of the increase came because of the Olympics. Take that out, and you get a much more pedestrian growth rate. Similarly, broadcast television put in a jaw-dropping 58% increase. But remove the effects of the Olympics and the Super Bowl, and revenue growth was only 4%. Meanwhile, NBCUniversal’s filmed entertainment segment saw revenues drop 15%. Remove the effects from special events and this quarter was much less positive for the segment than it first looked.
Regardless, the company beat on both the top line and bottom line. Revenue growth of 11%, income growth of 21%, and adjusted earnings up 17% all reflect a healthy business, even after dropping those figures a few points to account for the Olympics and Super Bowl. Certainly, it’s not the sort of results you’d expect to see with Comcast stock trading down to fresh 52-week lows.
Comcast Is a Tale of Two Businesses
The market has punished cable operators, such as Comcast, due to cord-cutting. It’s no secret that younger consumers are increasingly ditching their paid TV subscriptions. InvestorPlace’s Laura Hoy recently noted the problems that CMCSA is facing in its traditional business. Services such as Netflix, Inc. (NASDAQ:NFLX) are an increasingly attractive alternative. There’s no reason to suspect this trend to change. For now, live sports still make a cable package necessary for many folks, but even that appears subject to change.
That said, there’s far more to Comcast than a slowly-dying cable business. No, the real money here is in its internet fiber. Even with widespread adoption of unlimited 4G plans, an estimated 75% of the country’s data still goes by fiber/wifi. The upcoming deployment of 5G should drive even more demand for the company’s fiber.
Some see 5G as a big threat to Comcast. However, if data plans are to remain unlimited, it’s hard to see how the vastly increased demands for data would be met without tapping into the fiber networks that companies such as Comcast own. Yes, 5G is a challenge, but it could also be an opportunity if management plays their cards well.
Comcast and Sky Deal
CMCSA, which is already quite the conglomerate, is looking to make another big addition. At the same time it released earnings, it formally announced its higher bid for British firm Sky Plc ADR (OTCMKTS:SKYAY). Sky is one of Europe’s largest paid TV providers. Its investments in technology and its own produced content have made it a hot commodity; its market cap has surged past $30 billion as Twenty-First Century Fox Inc (NASDAQ:FOXA) and Comcast have put in rival bids for the firm.
Originally, it appeared Rupert Murdoch would easily add the rest of Sky to his Fox empire. Fox already owned 39% of Sky’s stock and had a deal to buy the rest. It appeared the plan was for Fox to get 100% of Sky, and in turn flip that to Walt Disney Co (NYSE:DIS). Disney, you might recall, has a plan to buy a large chunk of Fox’s TV business. But now, with Comcast offering a 16% premium to Fox, Sky’s board has pulled support for Murdoch’s offer.
How this plays out for CMCSA remains to be seen. On the one hand, if this Comcast offer succeeds, it can potentially reset the narrative for a stock that is too cheap. People are (unfairly) thinking of Comcast as an out-of-date and shrinking business. Exposure to the successful Sky content business should change the market’s perception. On the other hand, there’s a real risk that Comcast and Fox/Disney get into a bidding war. The last thing Comcast stock owners want is for the company to overpay for Sky here.
Verdict on Comcast Stock
Comcast stock looks like a steal at these levels. It is now trading at 14x trailing and 11x forward earnings. That’s pretty remarkable for a firm where analysts see earnings growing at a double-digit compounded rate over the next five years.
Comcast is also rewarding its patient shareholders with impressive capital returns. CMCSA stock is becoming one of the most exciting in the dividend investing growth universe. It has raised its dividend 11 years in a row, which each increase topping 10%. That makes for some impressive compounding.
Comcast stock is now yielding 2.4%, topping the S&P 500’s yield comfortably. On top of that, Comcast is buying back almost twice the amount of its annual dividend payment in stock. With the share price down lately, those buybacks can supercharge earnings going forward.
Now, to be fair, it’s not all good news. The company’s core cable business has serious long-term headwinds. And who knows how the Sky wheeling and dealing will turn out. But the majority of signs point to upside ahead for CMCSA stock.
At the time of this writing, the author had no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
