Over the past 10 years, prices of Comcast Corporation (CMCSA, Financial) shares have risen roughly 400%, or as Peter Lynch would say, it's been a four-bagger for investors.
CEO Brian L. Roberts reflected on the past decade in the 2019 letter to shareholders. Among the highlights were:
- Launching the Xfinity brand and the X1 cloud-based entertainment platform.
- New investments in broadband that led to the creation of xFi.
- The launch of Xfinity Mobile and Flex.
- Acquiring NBCUniversal and the European premium television business, Sky.
In its 10-K for 2019, the company described itself as follows: "We are a global media and technology company with three primary businesses: Comcast Cable, NBCUniversal and Sky." The best known product is the NBC Network, one of the original big-three broadcast television networks.
Comcast claims it is committed to increasing shareholder value and offered this evidence of its sincerity in the June 2020 annual meeting presentation:
According to Comcast, its three priorities for capital allocation are "maintaining a strong balance sheet, investing organically for profitable growth and returning capital to shareholders."
Financial strength
Comcast gets a middling score for financial strength because of the amount of debt on its balance sheet. As the chart below shows, it has taken on a load of it in recent years (along with a hefty repayment last year):
Interest coverage is 4.36 times, which is relatively poor. As GuruFocus explains, "Ben Graham requires that a company has a minimum interest coverage of 5 with the companies he invested. If the interest coverage is less than 2, the company is burdened by debt. Any business slow or recession may drag the company into a situation where it cannot pay the interest on its debt."
While the Piotroski F-Score is fine at 7, the Altman Z-Score of 1.59 is worrying. Comcast is now in the Altman distress zone, indicating the company could be bankrupt within two years. Although that seems unlikely due to the company's ability to take on more debt, investors will want to watch what management does, especially considering the current economic conditions.
The company, on the other hand, seems comfortable with the leverage. In its second-quarter earnings release, it reported it had paid $1.1 billion in dividends and had increased the dividend from $0.84 to $0.92, an increase of 9.5%. That was its 12th consecutive annual increase.
There is a slim difference between its return on invested capital (ROIC) and its weighted average cost of capital (WACC) at 6.45% versus 5.21%, indicating overall profitability.
Overall, I would say the GuruFocus score of 4 out of 10 is reasonable.
Profitability
Profitability is obviously Comcast's strongest suit, thanks to good margins:
Return on equity is better than that of the competition in the media–diversified industry, while return on assets is roughly the same. In both cases, current results are not as strong as they have been in the past.
On the last three lines, the growth metrics look good, with the earnings per share average over the past three years better than the average annual revenue growth rate. That implies some increased efficiency.
Valuation
Does Comcast have a margin of safety? That depends on which model you follow. The GF Value line above puts fair (or intrinsic) value at $45.27, just pennies above the current price. That implies there is no margin of safety.
On the other hand, the discounted cash flow (DCF) calculator, based on a business predictability score of 3.5 ouf of 5, comes up with a significant margin of safety using the below assumptions:
Turning to the price-earnings ratio, we find the 10-year median is 17.29, slightly below the current ratio of 18.2, implying the stock is close to being fairly valued.
The PEG ratio (which is the price-earnings ratio divided by five-year Ebidta growth), comes in at 1.69, which suggests the stock is overvalued.
It seems that prospective buyers will need to do some serious due diligence on valuation.
Dividend and share buybacks
Comcast has increased its dividend every year for the past 12 years, meaning it is almost halfway to qualifying as a Dividend Aristocrat (which would need 25 years of dividend growth). Still, it is a relatively low dividend yield at just under 2%, and only slightly above the average of S&P 500 companies.
There is room to grow the dividend quite a bit more since the dividend payout ratio is only 35% with an average annual dividend growth rate of 15.2%. Free cash flow has been growing, so future increases should not be a problem:
Applying the rate of increase over the past five years to the existing yield over the next five years gives us a five-year yield-on-cost of 3.74%.
The forward yield is higher than the TTM (trailing twelve-months) yield because the dividend went up in the second quarter.
A positive share buyback ratio tells us the company has been repurchasing its shares; over the last 10 years the share count has come down by a total of 18.26%.
Gurus
Comcast is one of the most popular stocks among the gurus followed by GuruFocus. Among them, 34 had positions in the stock at the end of the second quarter, and recently they've been buying it at a faster clip than selling:
Dodge & Cox has the largest holding with 83,660,688 shares, representing 1.83% of Comcast's shares outstanding and 3% of its own funds under management. It added 1.09% in the quarter.
First Eagle Investment (Trades, Portfolio) owns 32,610,514 shares after adding 0.05% in the quarter. Andreas Halvorsen (Trades, Portfolio) of Viking Global Investors made a big leap, adding 59.33% to end the quarter with 28,523,676 shares.
Conclusion
As I worked my way through the fundamentals, I found no compelling case to buy Comcast and was uncertain about what kind of a valuation to choose. What persuaded me to take a positive stance was the strong show of confidence by the gurus; 34 of them have investments in the company. Relatively few companies have that many famous fund managers holding their stock.
Still, I would expect value investors to look elsewhere; Comcast may have its debt under control, but buying a company with high debt that will likely need to take on more debt would not get the approval of Benjamin Graham, the father of value investing.
Growth investors might look past the debt and focus more on the drivers of higher revenue and earnings per share, expecting that improvement to be reflected in the share price. For income investors, there are other mature companies that generate higher dividends and yield-on-cost.
Disclosure: I do not own shares in any of the companies named in this article.
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