Another Dip Creates Another Opportunity in Comcast Stock

A bounce off March lows has reversed, but Comcast should still march past pre-pandemic highs

In mid-February, Comcast (NASDAQ:CMCSA) stock traded at $46. As I write this, it sits just below $40. It’s worth considering what has changed with the business to justify that kind of decline in Comcast stock.

Another Dip Creates Another Opportunity in Comcast Stock
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Obviously, the novel coronavirus pandemic has been the primary factor. Broad market selling sent Comcast’s stock plunging beginning in late February. Yet, unlike many other large-cap names, the stock hasn’t recovered its losses. In fact, down approximately 14%, it hasn’t really come close.

To be sure, the business is taking a hit right now. Comcast’s Universal Studios theme parks closed for weeks, and they are still limiting attendance. The movie and television businesses are pressured as well, as theaters stay closed and advertisers cut back on spending on networks like NBC and USA.

But those hits are, for the most part, temporary. Meanwhile, there’s a potentially permanent change to Comcast’s most important, and most profitable, business. That’s where investor attention should be focused. Once it is, I expect Comcast stock to not only recapture its losses, but make new highs.

The Bad News First

An investor need only look at April’s first-quarter earnings report to see the impact of the coronavirus on several of Comcast’s business units.

For NBCUniversal, for instance, profits fell by one-quarter year over year. Its Filmed Entertainment unit saw revenue fall 22% and earnings drop over 70%. The theme park business did even worse: revenue was off 32% (bear in mind the unit has a big presence in Asia) and profits were down 85%.

Europe’s Sky, picked up in a bidding war in 2018, posted a 15% decline in profits. The Cable Networks business held up, and Broadcast TV actually had a stellar quarter, but those businesses are going to have a difficult second quarter. Meanwhile, trading in the likes of ViacomCBS (NASDAQ:VIAC, NASDAQ:VIACA) and Discovery Communications (NASDAQ:DISCA) shows investors are still pricing in significant mid-term pressure on television networks.

For those businesses, in particular, it’s too optimistic to believe that a rebound will come quickly — or that it will come at all. Stay at home orders instituted worldwide this spring have no doubt accelerated “cord-cutting.” As a result, investors are pricing media assets as if earnings have peaked for good.

I’m not convinced they’re wrong to do so, which is a potential problem for Comcast’s video business as well.

To be sure, I expect Comcast’s theme park business will return to normalcy at some point, as will be the case for industry leader Disney (NYSE:DIS). We’ll see how the movie theater business rebounds, but there are risks there too.

It’s these pressures that spooked Comcast stock investors in March. And it’s these pressures that are likely keeping a lid on the stock in June.

The Good News for Comcast Stock

But it’s also worth taking a step back and reviewing the first-quarter report from a high level.

With literally unprecedented pressure hitting several businesses, Comcast’s revenue in Q1 still increased year over year. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) declined less than 5%. And the company still generated $3.3 billion in free cash flow.

And that’s because the Cable Communications business grew. The segment is far and away the biggest, generating over 70% of the company’s profit in Q1.

Again, the company may lose more video subscribers from cord-cutting. But at this point, executives may not even care. Executives at peers Charter Communications (NASDAQ:CHTR) and Cable One (NYSE:CABO) have both essentially said “good riddance” to cord-cutters. Thanks in large part to the onerous costs of sports programming, video subscribers simply aren’t that profitable.

Changing consumer behavior is going to hit part of Comcast’s business. But this is going to affect the smaller parts — movies and TV — and the less profitable part, cable TV subscribers.

Broadband and Streaming

It’s going to help the broadband business, however. In this day and age, Comcast is already a utility. Indeed, there are more than a few consumers who can last longer without water than we can without the internet.

The importance of broadband only has grown. Cord-cutters and telecommuters can’t skimp on broadband speeds. They can’t use cheaper alternatives. Satellite alternatives aren’t fast enough or reliable enough.

Comcast has an absolutely dominant, essential, business underpinning its earnings. And that’s where investor focus should be: on the best business that is the most important to overall profits.

Comcast stock trades at less than 14x earnings, a multiple that suggests the business basically is done growing. Its dividend yields 2.3%, more than double the 10-year Treasury.

And there’s one more piece of potential good news. Comcast’s streaming service, Peacock, launches next month. There’s probably room for another entrant behind Netflix (NASDAQ:NFLX) and Disney. AT&T (NYSE:T), which rebranded its offering two weeks after a disappointing launch, has made room for Comcast.

But streaming success isn’t required for Comcast to rally. The broadband business is more than enough. And I believe investors will figure that out soon enough.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


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