Comcast Stock vs. Disney Stock: Which is the Better Buy?

DIS stock has a huge positive catalyst on the way

Another InvestorPlace contributor, Will Healy, recently stated that “Comcast (NASDAQ:CMCSA) stock delivered an impressive quarterly report.  But he also noted that  Comcast stock barely reacted to the news. 

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Both Healy and another IP columnist, Josh Enomoto, feel the subdued reaction has something to do with Comcast not having any catalysts to drive the CMCSA stock price higher. 

Both have made compelling arguments about why Comcast stock will remain range-bound for the foreseeable future. But  I wonder if CMCSA’s lack of movement has less to do with catalysts and more to do with investors opting for Disney (NYSE:DIS) heading into 2020 and what appears  to be the mother of all streaming wars. 

As Healy noted in his Aug. 6 article, CMCSA stock trades at a forward price-earnings ratio under 13  despite the fact that analysts,on average, expect its EPS growth to be 20% in 2019 and 11% in 2020. 

In other words, it’s pretty darn cheap when compared to Disney’s  forward P/E of 21.6 .    

But is CMCSA the better stock? 

Why Comcast Stock Is the Better Buy

Comcast’s free cash flow over the trailing 12 months was $14.0 billion. Its current enterprise value is $301.7 billion, putting its free cash flow yield at 4.7%. 

Disney’s free-cash-flow for the trailing 12 months was $3.4 billion, considerably lower than in a typical year, partly due to the payment of certain tax obligations resulting from its acquisition of 21st Century Fox.   Lower operating income from some of its segments and higher interest payments also dragged down its free cash flow. 

In 2018,  Disney had free cash flow of almost $10 billion.

So, based on free cash flow of $3.4 billion and an enterprise value of $301.2 billion for DIS stock, its free -cash -flow yield its 1.1%. But based on Disney’s five-year average free cash flow  of $7.9 billion, its FCF yield was 2.6%. 

Comcast generates higher free cash flow than Disney, yet it has a lower price-free-cash-flow multiple than Mickey Mouse. 

If you value free cash flow, as I do, you’ve got to like Comcast’s cash-flow statements. Interestingly, the two companies have almost identical enterprise values, which is the amount a prospective buyer would have to pay to buy either business. 

Comcast’s free cash flow-margin (derived by dividing its $14 billion of free cash flow by its $103.7 billion of revenue) is 13.5%, 1.30 percentage points higher than Disney’s ($7.9 billion divided by $64.8 billion). I used  Disney’s five-year average free cash flow for that calculation.

Based on free cash flow-margin, Comcast is the better buy.

Why Disney Stock Is the Better Buy

I can think of no more significant catalyst at this point than the Disney streaming bundle, which includes Disney+, ESPN+, and an ad-supported version of Hulu for $12.99. That’s the same price as Netflix’s (NASDAQ:NFLX) most popular subscription package. 

According to VOX, buying all three streaming services separately would cost $19 per month. Disney’s bundle will test Netflix’s mettle. 

Disney is using its streaming services for entirely different purposes than the rest of its peers, including Comcast. 

“While obviously Disney+ will compete against Netflix for customer attention, the goals of the two services are very different: for Netflix, streaming is its entire business, the sole driver of revenue and profit,” the tech newsletter Stratechery stated in April. “Disney, meanwhile, obviously plans for Disney+ to be profitable — the company projects that the service will achieve profitability in 2024, and that includes transfer payments to Disney’s studios — but the larger project is Disney itself.”

Disney expects its streaming services to become profitable in 2024. In the meantime, it will continue to drive subscribers of the streaming service to its various operating segments, including Disney Parks and Resorts. 

Bob Iger’s last two moves (Disney+ and 21st Century Fox) will cement his legacy as one of America’s smartest CEOs. 

This, more than anything, is why DIS stock deserves a higher multiple than Comcast. 

The Bottom Line

Even though Comcast might not have any catalysts at the moment, I don’t think buying its stock at its current prices would be a mistake.  But investors who buy Comcast stock should  hold back some cash for its next big correction. That decline will probably take Comcast stock back to the low $30s where it traded at the end of 2018. 

Disney is the better company, and if I could only own one of the two stocks, I’d buy DIS. That said, Comcast stock currently provides more value 

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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