One of the most-owned stocks among value-hunting super investors is Comcast Corp. (CMCSA, Financial). Some of the biggest names in the industry own this stock. Top investors include Andreas Halvorsen (Trades, Portfolio)'s Viking Global Investors, which owns 14 million shares, Nelson Peltz (Trades, Portfolio)'s Trian Fund Management with over 1 billion shares, Daniel Loeb (Trades, Portfolio)'s Third Point and Tom Gayner (Trades, Portfolio) at Markel Asset Management.
The $34 billion Viking increased the size of its position by nearly 40% in the fourth quarter of 2021, suggesting the firm believes the stock is undervalued.
Considering the shareholder roster of Comcast, I thought it might be worth taking a closer look at the enterprise to see if the shares might offer value at current levels.
Cheap without a catalyst
Without digging too much into the fundamentals, the business does appear to be cheap.
At the time of writing, it is trading at a forward price-earnings (multiple of 13.2. With earnings per share expected to grow at a double-digit percentage for the next two years, the stock is trading at a 2023 price-earnings ratio of 11.8, which looks relatively cheap compared to the rest of the telecommunications industry.
Due to the nature of the telecommunications industry, price-earnings multiples can be misleading. They do not take into account capital spending obligations, and they are also distorted by depreciation and amortization costs.
A better metric to use is free cash flow. Comcast's free cash flow per share figure for the 2021 financial year was $3.67.
This number implies that after recent declines, the stock is trading at a trailing 12-month free cash flow yield of 7.8%, one of the cheapest multiples in the last five years.
To put it into perspective, on April 1, 2020, when markets around the world were plunging as the pandemic shut down global economies, the stock traded down to a free cash flow yield of 8.9%.
From an investment perspective, Comcast's most attractive quality is its cash generation. It generated record free cash flow of $17.1 billion in 2021.
Of this, the business returned $8.5 billion to shareholders.
Media giant
The company is a media giant. It owns Universal Studios, NBC and a streaming service, Peacock. In addition to these theme park, movie and TV assets, the company also owns a cable company. This could be either a benefit or a drawback depending on one's view of the cable and broadband sector.
Infrastructure assets such as these can be solid cash generators, but the market is hyper-competitive and requires enormous levels of capital spending. Nevertheless, these assets do provide cash flow for Comcast's media business.
The company is highly cash generative, owns a portfolio of unique assets and seems to be looking after shareholders.
Considering these attractive qualities, it seems strange that the stock is trading at such a lowly valuation.
It seems the market might just think its competitors have better prospects. Comcast is having to stand up to the likes of Disney (DIS, Financial) in the content and theme park markets.
In the content market, Netflix (NFLX, Financial) has a stronger profile, and in the cable and broadband market, Charter Communications (CHTR, Financial) has a better story as a pure-play operator. If I had to allocate to one of these companies, I wouldn't pick Comcast. Disney has a stronger brand and Charter has better economics. Its operating margin sits at 20% compared to Comcast's 18%.
This could be an opportunity. Comcast has room to create value. It could continue to buy back stock or spin off the infrastructure assets, leaving a pure-play content producer.
If the company takes any one of these actions, it could provide a catalyst to unlock value. In the meantime, investors may continue to avoid the company in favor of its competitors.
