Comcast (CMCSA, Financial) is one of the most owned stocks among hedge funds. It is also one of the cheapest based on free cash flow generation. According to my analysis, it is trading at a trailing 12-month free cash flow yield of around 6%. Thus, could this stock be a value opportunity for the braoder investing community as well? What is it that hedge funds like about Comcast?
Undervalued
One of the biggest owners of the stock is Nelson Peltz (Trades, Portfolio)'s Trian Fund Management. According to the firm's most recent 13F, which details the positions owned at the end of the first quarter of 2021, the hedge fund owned just under 20 million shares of the enterprise, giving it a 12.7% portfolio weight.
John Armitage's Egerton Capital is also a significant investor, owning around 9.5 million shares. However, this is a relatively modest position for the group with a 2.7% portfolio weight. Thomas Russo's Gardner Russo & Quinn owns 5.5 million shares, and Thomas Gayner's Markel Asset Management owns around 525,000 shares.
Peltz's stake is the most interesting because it is a relatively new holding. The activist investor initiated the position in the second half of last year. He later went on to say that he believes the stock is "undervalued."
Mixed year
Comcast had a relatively mixed 2020. Cable network revenue for the year fell 6%, while its filmed entertainment revenue tumbled nearly 19%. Earnings per share for the year fell by around 17% compared to 2019.
Looking through the numbers, a different picture emerges. Broadband and Business Services revenue actually increased last year. Broadband revenues increased from $18.7 billion to $20.6 billion. Meanwhile, Business Services revenues increased from $7.8 billion to $8.2 billion. The fall in revenues at other divisions was also nowhere near as bad as headline figures suggest.
Broadcast television revenues dropped by just $17 million to $10.24 billion. Cable TV revenues dropped by -1.8% to $21.9 billion, while Sky's revenues dropped by 3% to $18.6 billion.
Initial figures indicate that the company's growth has accelerated in 2021. According to Comcast's first-quarter earnings release, total customer relationship net additions at its cable communications business were 380,000, the best quarter on record.
In addition, total broadband customer net additions were 461,000. Incremental Sky customer additions came in at 221,000, taking the number of customers to 23.4 million, which, according to the company, was the best quarter result in six years.
With growth returning across the business, the company reported revenue growth of 2.2% year over year for the quarter and net income growth of 45% as it benefited from economies of scale.
The first-quarter earnings release shows the group generated $5.9 billion in cash during the three months to the end of March. Using a back-of-the-envelope valuation, this works out at $23.6 billion a year. This suggests the stock is trading at a free cash flow yield of 8.7% based on the current market capitalization.
Buyback potential
The above number is only speculative as it is based on very simple calculations. It does not give any weight to working capital changes or planned investment activity throughout the year. Nevertheless, it appears to show how conservatively valued this business is compared to other options.
The yield on the 10-year Treasury note is approximately 1.25% at the time of writing. By the end of 2020, the free cash flow yield for the S&P 500 was around 1.1%. So, compared to other investments, the stock looks relatively cheap.
It also has the potential to return significant amounts of capital to investors. The company repurchased shares worth $5 billion in 2017, $5 billion in 2016 and $6.8 billion in 2015, and while it suspended the buybacks in 2018, the group provided hope for dividend investors when it reported its results for 2020. CEO Brian Roberts stated, "it is now our expectation that we will be in a position to begin repurchasing shares again in the back half of this year." With free cash flow expanding, I think this is what the hedge fund managers are hoping for.
