Comcast Corporation (NASDAQ:CMCSA) has a stable and growing internet business that makes its shares a real bargain. I believe CMCSA stock will continue to move higher as earnings and cash flow are likely to gain some momentum.
For example, last year the company delivered earnings of $2.14 per share. This year, analyst estimates compiled by Seeking Alpha expect EPS to grow to $2.34 this year and $2.90 in 2021. That represents growth of 9.3% this year and 23.9% in 2021. There are very few stocks that can claim this kind of growth rate in the midst of a recession.
Moreover, its free cash flow is very powerful. In 2019, the company generated $14.6 billion and in the previous 12 months to March, it made $13.3 billion. Moreover, first quarter FCF of $3.3 billion puts the company on a run-rate of about $10 billion per year. With its market value of $180 billion, CMCSA stock has an FCF yield of 5.56%.
That yield is more than double the stock’s current 2.3% dividend yield. That means its FCF covers the dividend. Moreover, the dividend has been growing consistently, more than 67% in the past four years.
Lockdowns Helped Comcast
Comcast has three reporting units, the largest of which is its Cable Communications division. The bottom line is that this unit’s EBITDA grew 6% during Q1. This is what is helping the company to show consistent growth. This division also accounted for 75% of the company’s $8.1 billion in adjusted EBITDA during the quarter.
Moreover, it turns out that high-speed internet and cable TV are Comcast’s cash cow producers. These services generate huge EBITDA margins of more than 40% for the company.
Compare that to its NBCUniversal unit. It produced 21.5% of the company’s adjusted EBITDA in Q1. But its margins were only 22.5%, much lower than the internet/cable division.
The same is true of its international Sky division. Those margins were only 12.2%. So, you can see that the novel coronavirus restrictions actually were beneficial to the company, as its Communications division helped sustain the company’s profitability and growth.
Cord-cutting Enhances Growth
Much has been written about the growth in cord-cutting, where consumers drop their cable TV subscriptions. The truth is that one can get everything they need today using high-speed broadband, and a Roku stick or a Chromecast dongle. Unbundling and video streaming are gaining momentum, according to a recent study cited by Barron’s.
This is good for Comcast, as it fuels demand for high-speed internet services from homes and businesses. The gains it makes in broadband customers cover the losses from video customers. For example, in Q1 Comcast gained 477,000 high-speed internet customers but lost 407,000 video clients.
But its high-speed internet revenue grew 9.1% compared to a slight 0.1% gain in video revenue in Q1 over the prior year. Moreover, the high-speed broadband revenue is now almost as large as the video revenue.
And don’t forget this division is extremely profitable with 40% margins. If these numbers continue at this pace, the gains in broadband revenue and EBITDA will more than cover for the cord-cutting cable TV subscription losses.
What to do With CMCSA Stock
I suspect that the company’s continued and consistent growth will eventually push up CMCSA stock’s market cap and valuation ratios over the next year.
For example, when investors realize that the company’s growth is accelerating in 2021, Comcast stock will likely trade at a higher price-to-earnings ratio. Right now the shares trade for 13.5x expected 2021 earnings of $2.90.
That ratio seems way too low for such a powerful and consistent growth company that Comcast has proven to be during this recession. I suspect that its true value should be more than like 20x its 2021 earnings.
That would give the CMCSA stock a price target of $58 per share. This represents a potential upside of over 47.9% from Wednesday’s closing price.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
