Since the begining of 2018, shares of Comcast Corp. (CMCSA) have fallen significantly, from $42 per share to $34 per share at the time of writing.
The reason for the decline is the company entered a bidding war to acquire pay-TV company Sky, offering 22.1 billion pounds ($31 billion), or 12.50 pounds per share. The offer is higher than Twenty-First Century Fox Inc.'s (FOXA) bid of 10.75 pounds per share.
Compared with its peers, Comcast appears to be quite undervalued. With a $159 billion market cap, the market values Comcast at only 7.7 times earnings before interest, taxes, depreciation and amortization, or EBITDA, a common valuation measure for media and cable enterprises. Both Twenty-First Century Fox and Charter Communications (CHTR, Financial) have much higher EBITDA valuations at 12.9 times and 10.35 times respectively. Even Sky, its acquisition target, captured a 13 times valuation.
Comcast seems to have lower financial risks than its peers due to lower leverage. Charter Communications has the highest debt level at 4.8 times debt-to-EBITDA. Twenty-First Century Fox is a bit lower at 3 times debt-to-EBITDA. Comcast’s leverage ratio is only at 2.25 times. If the company successfully acquires Sky, however, its leverage will be higher.
In 2017, Comcast generated $10.1 billion in free cash flow. If it uses all of its cash flow to acquire Sky, it will have to borrow $20.9 billion more. As of December 2017, Sky had $12.9 billion in debt and $3.84 billion in cash. If the deal goes through, Comcast’s EBITDA will be $31 billion while its debt will be $98.4 billion, including the leverage used for the acquisition. Thus, its debt-to-EBITDA ratio will be approximately 3.17 times, which is still reasonable.
| In Billions (USD) | Sky | Comcast | Combined (including acquisition leverage) |
| Debt | $12.90 | $64.56 | $98.36 |
| Cash | $3.84 | $3.43 | $7.27 |
| EBITDA | $3.00 | $28.00 | $31.00 |
| Debt/EBITDA (times) | 4.30 | 2.31 | 3.17 |
Comcast has two main business segments: Cable Communications and NBCUniversal. In 2017, the Cable Communications segment generated $21.2 billion in EBITDA. If this segment has a similar valuation to Charter Communications, at the current price, investors would basically get NBCUniversal for free. At 10 times EBITDA,Ă‚ NBCUniversal alone could be worth more than $82 billion.
As it is able to generate stong cash flow, Comcast frequently returns cash to shareholders through buybacks and dividends. Its current dividend yield is 2.2%. The company consistently increases the dividend by 21% and is expected to repurchase as much as $5 billion worth of shares in 2018. This buyback would add an additional 3.2% return to shareholders, bringing the total yeild to 5.4%.
With the lowest EBITDA valuation and lowest leverage among its peers, Comcast is a good investment opportunity currently. Investors will also benefit from a decent cash return.
