The hype and sizzle of cord-cutting will not hurt Comcast Corp.'s (CMCSA, Financial) underlying long-term value. The company's recent acquisition of Sky PLC (LSE:SKY, Financial) gives it a growth vehicle in Europe. With the stock trading at 12 times forward earnings, it shoud be bought regardless of market volatility.
Business overview
Comcast is the largest cable operator in the U.S., reaching 56 million homes and businesses with 22 million in its TV segment, 25 million on broadband and 12 million voice customers. It's also the absolute best value in mobile phone services.
Comcast also owns NBCUniversal, a leading media and entertainment producer that boasts national and regional cable networks USA, MSNBC, CNBC, E!, Telemundo and the NBC broadcast network. NBCUniversal also owns a film studio and four theme parks.
Bottom line: Comcast's position as the leader in media and cable is unquestionable.
Sky acquisition
In September, Comcast beat out Twenty-First Century Fox (FOXA, Financial) in an auction to acquire British media company Sky. As a Comcast customer, I would love to see some Sky programming in my home and office. For Comcast, the nearly $40 billion price tag was necessary if it wants to further solidify its position.
It was a good deal from a pricing standpoint as well. With Brexit putting massive pressure on the British economy, the pound to dollar ratio is at the lowest level in years. In 2015, the currency would have made this deal 20% more expensive for Comcast. Additionally, Sky continues to produce great numbers. At the current exchange rate, it adds over $3 billion in earnings before interest, taxes, depreciation and amortization on $18 billion in revenue, and now over 23 million households have access to Sky programming.
More importantly, the addition gives Comcast a strong foothold in Europe. While some analysts see paying 25 times earnings as an expensive acquisition, Sky has proven itself to be a growth driver that will easily pay for itself in time. In 20 years, the combined company will be much larger than today.
Risk-reward
With that in mind, Comcast now has to carry a lot more debt on its books, but now adds what could amount to $20 billion in revenue by 2019 and $1.5 billion to its bottom line. That puts Comcast over $10 billion in reliable annual income on $100 billion in sales.
While 5G from telecom companies may hurt some cable operators, Comcast's broad product line and low-cost leadership means it is only more likely to pick up customers, not lose them. The business services segment should be a source of growth for years as it picks up steam. Comcast has already rolled out its gigabyte internet at prices lower than many competitors, but really, who competes with them? No one.
Across its customer base, Comcast receives around $130 per user per month. Over time, that base will grow organically and through subsequent acquisitions. It isn't hard to imagine that in 10 years, Comcast could have 100 million total users paying $150 a month for a combination of services, most cheaper than their standalone counterparts. Cutting the cord is a nice story told by marketers, but the reality is bundling is still cheaper. Investors should take advantage of this deal while it lasts.
Disclosure: I am not long or short CMCSA.Â
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