Comcast Corporation's Risk To Reward Should Be Questioned

  • Despite decent earnings figures, there was no guidance and there are still holes to Comcast corporation's strategy going forward.
  • I view Comcast's portfolio inferior when compared to some of its peers and upside to valuation is somewhat limited.
  • The lack of predictability on both film slate and affiliate revenues imposes higher risks making the stock less compelling.

I’m initiating coverage on Comcast Corporation (NSDQ:CMCSA), and for the most part, I’m not nearly as enamored with the franchise when compared to other analysts. While there’s no denying that the cable communications revenue will stay intact, the quality of some of its cable channels raises questions. I mean, do we honestly think some of these channels will continue to stick around as cord cutting progresses?

Also read: Why You Should Exit Comcast Stock Now?

For example, Comcast owns CNBC, and yet CNBC is not a quality franchise. Of course, I may be biased when covering some of NBC Universal properties, but given the consistent decline in some of its cable channels (CNBC) one begins to wonder when CNBC will get excluded out of bundles given the lack of appeal and narrow audience demographic. The affiliate fees for sustaining niche categories make it prohibitive, and I really wonder what will happen to some of its other cable channels like Bravo, E! and Syfy. These lower-tier channels will struggle in a world where ESPN is struggling to maintain revenues.

If you really think about it, NBC hasn’t been doing all that great and according to Media Post, “In April, CBS was down 24% to 1.72 million prime time 18-49 viewers. ABC was also off 24% to 1.55 million viewership due to general program weakness, while NBC slipped 5% to 1.60 million viewers.”

Sure, ABC is technically owned by Walt Disney Co. (NYSE:DIS), so it’s hard to endorse Disney’s broadcast efforts as of late, but when combining a well-rounded cable portfolio in ESPN, Disney Channel and A&E it’s much easier to rationalize the qualitative aspects of Disney’s portfolio when compared to Comcast.

When weighing the constantly shifting television landscape it makes sense to own the highest quality franchises over the mid-tier brands like NBC, Bravo, E! and Syfy. I mean, I could live in a universe of apps and shows without Comcast branded channels. Likewise, I highly prefer Time Warner (NYSE:TWX) as the next best alternative due to its staple of quality franchises like HBO, TNT, CNN, Cartoon Network, and The CW. In a world where bundles get “skinnier” you can’t imagine bundles excluding Walt-Disney or Time Warner’s catalog, but I’m sure many can skip some of Comcast’s channels, which creates problems for investors as consolidation of packages will start with the culling of niche or less popular channels. Of course, stuff like AMC and Scripps Networks will likely survive, but I’m really skeptical of what’s going on in Comcast’s cable division. I mean, you’d really have to be a blind optimist to believe NBC Universal will be the last man standing in a world of cord-cutting.

Investors should focus on quality assets before investing into this space. In Time Warner, we get continuation of J.K. Rowling’s Harry Potter themed spin-offs, and the DC Universe of characters, which can be repackaged and sold into more and more movies. Solid, solid franchises in the form of Superman and Batman along with TV show spin-offs like Gotham insulate Time Warner. In the case of Walt-Disney, we get Marvel, Lucas films, Pixar and Disney studios. So, basically Star Wars, Avengers, Frozen and Toy Story sequels ($1 billion+ in global box office for each) plus many other franchises. Again, let’s go back to Time Warner Inc. we get HBO original series like Game of Thrones and Silicon Valley, which are considered the very pinnacle of original programming.

When weighing the comparisons, I walk away with the impression that Comcast can live outside of most investor portfolios. On the film front, Universal Studios partially redeems itself with Jurassic World and Furious 7. But, the quality of its franchises generally pales in comparison to its more well-esteemed peers.

Furthermore, analysts are rationalizing that CMCSA is worth a look because of its cheap valuation:

Comcast trades at a modest 8.1x 2016E EV/EBITDA. At our target price, the stock would trade at 8.5x EV/EBITDA, which assumes 10x for NBCU and 8x for Cable Communications, broadly in line with peers. Forecasts unchanged, raise TP to $69: We leave our 2016/17 EPS forecasts unchanged at $3.54/$3.94 after Q1 earnings, but raise our TP to $69 (from $63), which assumes the stock can trade at 8.5x 2016E EV/EBITDA (previously 8x). – Omar Sheikh from Credit Suisse

Updating Estimates: We model 2016E consolidated revenue of $78.7B (previous: $78.4B) with cable and NBCU revenues of $49.9B and $29.8B respectively, vs. previous $49.8B and $29.5B. 2016E adj. EBITDA is $26.7B (previous: $26.3B). We raised 2016E video and HSD net adds from -40K and 1.26M to 59K and 1.33M. We raise our price target to $70 on flow-through impacts. Jonathan Atkin from RBC Capital Markets

When compared to prior-year results, there’s some momentum to sales/earnings but I really can’t endorse the stock when compared to the quality franchises that some of its other peers possess. Sure, the company has been able to mitigate subscriber churn this year, and still sustained some growth in its broadcast and cable network. Revenue was single digit positive, so it’s not like Comcast has completely lost its momentum. However, when I value Comcast using similar assumptions to other analysts, I arrive at a price target of $67 (18x EPS). There’s not a whole lot of upside left, and with the stock moving lower, investors are really concerned by the lack of management guidance.

When working purely off of the predictions of sell-side models, quarters can get extremely volatile. Basically, there’s the potential risk that Comcast has some bad quarters, but because it was broadly unanticipated the stock will exhibit much higher volatility.

As such, when taking into consideration the business portfolio, limited valuation upside, and low visibility on sales/earnings I’m assigning a hold recommendation to Comcast Corporation stock. Clearly, there are higher quality alternatives within the space, which makes it that much more difficult to rationalize a compelling case for Comcast. Stick with Walt Disney Co or Time Warner.

Also Watch: Amigobulls Comcast Stock Analysis Video.

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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