Alongside the rest of the market, shares of telecom and media giant Comcast (NASDAQ:CMCSA) have had a strong 2019, rising an impressive 36% year-to-date. The drivers of the rally have been broadly improving U.S. economic conditions, the healthy operating results of its broadband internet business despite 5G competition, and the belief that its streaming TV push could provide a positive catalyst over the longer term.
Yet, despite the huge gain of Comcast stock in 2019, CMCSA stock still remains pretty cheap. At this point, CMCSA stock trades at just 13.7 times analysts’ average forward earnings estimate. That’s below the market’s average multiple of 17 times forward earnings, and also below the cable and satellite communication sector’s average forward multiple of 17.
Thus, the multiple of CMCSA stock can still rise further. And thanks mostly to its streaming TV push, its earnings per share can increase meaningfully over the next several years.
So this rally of Comcast stock isn’t over just yet. A healthy combination of P/E multiple increases and profit growth should drive CMCSA stock above $50 in the near future.
Comcast Has Healthy Profit Growth Potential
The fundamentals supporting CMCSA stock over the next several years are likely to remain healthy and should drive stable and healthy profit growth.
Comcast is basically two big businesses. It has a telecom business and media businesses. Both businesses are growing. But both businesses are challenged by cord-cutting. On the telecom side, the company is losing video subscribers due to cord cutting. On the media side, cord cutting is lowering its cable ad revenue.
Comcast has come up with a solution to fix its cord-cutting headache: a full pivot into the streaming world. Its streaming strategy has two main elements. First, it is giving away streaming TV boxes for free to every one of its internet subscribers. As a result: 1) the number of Comcast broadband internet connections should increase 2) Comcast should gain a foothold in the streaming TV world, and 3) the company should benefit from high-margin, streaming-video-ad dollars.
Second, CMCSA has launched a streaming TV service, dubbed Peacock. Comcast hopes to convince some cord cutters to subscribe to its streaming service. Peacock should be reasonably successful, given NBC’s huge slate of very popular content, including The Office and Parks and Recreation (Peacock will be the only service that will stream those two shows).
With its aggressive pivot into streaming TV over the next several years, Comcast will pave the path for healthy growth of both its telecom and media businesses. Consequently, its profits should rise at a meaningful rate.
Though the roll out of 5G is an existential threat to broadband internet, Comcast has many levers it can pull to delay and/or offset this threat for at least the next several years. Among these levers are upping connectivity speeds, running promotions, and cutting prices.
Thus, despite the big 5G risk, Comcast should be able to grow its profits over the next few years, providing a positive catalyst for Comcast stock.
Comcast Stock Could Still Benefit From Multiple Expansion
CMCSA stock should also be boosted by increases in the company’s P/E multiple over the longer term.
Here are the numbers. Comcast stock presently trades at 13.7 times analysts’ average 2019 earnings estimate. The market trades at 16.7 times forward earnings. The average forward earnings multiple in the cable and satellite communications sector is 16.8. Thus, Comcast stock trades at a roughly 10% discount to the market and its sector.
One could reasonably argue that Comcast deserves a lower multiple. But analysts’ average long-term earnings growth estimate for the market (around 12%) is nearly identical to their average long-term projected earnings growth rate for Comcast (also around 12%, according to YCharts). Thus, based on the company’s growth outlook, Comcast stock should trade in-line with the market.
That means that, over the next few quarters to years, the P/E multiple of CMCSA stock has room to expand by about 10%. On top of healthy, mid-single-digit profit growth, that should easily drive Comcast stock north of $50 in the foreseeable future.
The Bottom Line on CMCSA Stock
Comcast stock won’t be a huge winner going forward. A lot of the powerful rally of CMCSA stock has already happened. But the rally isn’t entirely over, either. Instead, over the next few years, Comcast stock should drift higher due to gradual multiple expansion and stable profit growth.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
