SPECIAL REPORT The Top 7 Stocks for 2024

The 3 Most Undervalued Communications Stocks to Buy: October 2023

Advertisement

  • All three of these communication stocks have low forward P/E and P/CF ratios. 
  • Comcast (CMSA): Its shareholders will be rewarded after the Hulu sale.
  • Verizon Communications (VZ): The wireless carrier’s free cash flow continues to grow. 
  • Fox Corp. (FOXA): The baton has been passed from generation to generation. 
Undervalued Communications Stocks - The 3 Most Undervalued Communications Stocks to Buy: October 2023

If you’re on the hunt for undervalued communications stocks, the task might be difficult.

According to Yardeni Research, the communication services sector has the best performance year-to-date of the 11 S&P 500 sectors, with a 45.6% return through Oct. 24. 

What kind of stocks are in the communications sector? According to State Street, it includes companies involved in diversified telecommunication services, wireless telecommunication services, media, entertainment, and interactive media & services.  

The Communication Services Select Sector SPDR Fund (NYSEARCA:XLC) tracks the 22 holdings from the S&P 500. The weighted average market cap of these stocks is $676 billion. My job is to find three of these large caps that are undervalued. 

I’ll use price-to-cash flow and price-to-earnings as my measuring sticks for this article. 

The average P/CF of the Communication Services Select Sector Index is 9.81. The average forward P/E is 17.11. Those that make the cut should be less than average. 

So here are the best undervalued communications stocks to buy.

Comcast (CMCSA)

Rack Mounted Servers In A Server Room, Server rack audio cable. Severs computer in a rack at the large data center. Fiber Optical connector interface for Cards Equipment DWDM telecommunications. KLR stock
Source: Funtap / Shutterstock.com

Comcast (NASDAQ:CMCSA) has a lot of assets. One will soon be sold to Walt Disney (NYSE:DIS). I’m speaking about its one-third interest in Hulu, the streaming service owned in partnership with Disney, which owns the other two-thirds. 

At the moment, investment bankers for both sides are working on providing a fair value for Comcast’s share of the business. On Nov. 1, Disney has the option to trigger the purchase, while Comcast has the opportunity to trigger its sale. One way or the other, Disney is buying and Comcast is selling. 

When the two parties set up this arrangement in 2019, they put a floor value of $27.5 billion for all of Hulu. That suggests the minimum price Disney will pay is $9.2 billion, or one-third of that floor. 

The two investment banks hired to each do a valuation for Hulu, Morgan Stanley and JPMorgan will deliver their valuations after Nov. 1. If they are within 10% of each other, they’ll take the average of the two, and Disney will pay the piper. This makes it one of those undervalued communications stocks.

If not, they’ll bring in a third investment bank, and the valuation would become the average of the three. 

Disney gets 100% ownership of Hulu, which it bundles with Disney+ and ESPN+, and Comcast returns the net proceeds to shareholders. It’s a win/win. 

Comcast has a forward P/E and P/CF of 11.93 and 8.81, respectively. 

Verizon Communications (VZ)

Verizon store sign. VZ stock.
Source: Shutterstock

If I choose between buying Verizon Communications (NYSE:VZ) or AT&T (NYSE:T), I’ll always go with the former rather than the latter. 

Then AT&T CEO Randall Stephenson’s misguided purchase of the media company distracted AT&T for several years. Worse still, despite having no experience in media, apparently refused to listen to Time Warner executives. It’s challenging to unravel a poor corporate culture. 

As for Verizon stock, it had its best day in nearly 15 years on October 24, up more than 9%. The wireless carrier reported Q3 2023 results that beat analyst estimates on the top and bottom lines. ]

Its revenue was $33.34 billion in the third quarter, $90 million higher than the consensus estimate. Its adjusted earnings per share were $1.22, four cents higher than analyst expectations. In addition, it added 100,000 wireless subscribers in the quarter, 38,000 higher than the analyst estimate.

As a result of the strong quarter, it raised its free cash flow estimate for 2023 by $1 billion to more than $18 billion in the year. Based on an enterprise value of $312.1 billion, it has a free cash flow yield of 5.7%. Anything between 4% and 8% is growth at a reasonable price. 

Verizon has a forward P/E and P/CF of 7.85 and 3.83, respectively.  

Fox (FOXA)

A remote being held and pointed at a black flatscreen tv with two potted plants on either side
Source: shutterstock.com/Gaurav Paswan

How you view Fox (NASDAQ:FOXA) shareholder returns depends on when you bought shares in the media company. You’re happy as a clam if you picked some up in the March 2020 correction. However, if you purchased In February 2022, you’re crying in your beer. 

The company made news recently when Rupert Murdoch announced in September that he would step down as CEO of both Fox and News Corp. (NASDAQ:NWSA), handing the reins over to his son Lachlan.  

There’s only one problem: the eldest son might not be eager to run the businesses over the long haul. A recent Fortune and Associated Press article about the change suggests that Lachlan is more comfortable living in Australia, working remotely, and sometimes commuting.

That might not cut it, given its FOXA shares are 27% over the past five years.

Between the company’s $787 million settlement in April with Dominion Voting and stock losses due to Tucker Carlson leaving the network a couple of weeks later, it has not been a great year for the owner of Fox TV Network. 

Financially, the company’s latest fiscal year (June year-end) was reasonably good. Revenues were up 6.7% to $14.9 billion, while its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 8.0% to $3.2 billion. 

Verizon has a forward P/E and P/CF of 11.09 and 8.98, respectively.   

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2023/10/the-3-most-undervalued-communications-stocks-to-buy-october-2023/.

©2024 InvestorPlace Media, LLC