Should You Buy Comcast, Or This Industry Peer?

Jul.24.14 | About: Comcast Corporation (CMCSA)

Summary

We pitch two companies from the broadcasting and cable TV sector, Comcast and DIRECTV, against one another in the latest instalment of our Head-To-Head series.

The article focuses on the relative strengths and weaknesses of Comcast and DIRECTV based on business performance and sustainability/dividends/forecasts.

It ends with discussion of the current valuations of the two companies, and details whether Comcast represents good relative value at current price levels.

Comcast Background

Comcast (NASDAQ:CMCSA) operates as a media and technology company worldwide. It operates through Cable Communications, Cable Networks, Broadcast Television, Filmed Entertainment, and Theme Parks segments. The Cable Communications segment offers video, high-speed Internet, and voice services to residential and business customers under the XFINITY brand name. The Cable Networks segment operates national cable networks, which provide entertainment, news and information, and sports content; regional sports and news networks; international channels; and cable television production operations, as well as owns digital media properties. The Broadcast Television segment operates NBC and Telemundo broadcast networks. The Filmed Entertainment segment produces, acquires, markets, and distributes live-action and animated filmed entertainment under the Universal Pictures, Focus Features, and Illumination names. The Theme Parks segment operates theme parks; studios; Island of adventures; and a dining, retail, and entertainment complex.

Team Money Research Rating

Our investment philosophy is to focus on company fundamentals and identify stocks that are displaying strong business performance, that operate sustainably and that pay a decent, well-covered dividend.

We analyze each company relative to the other on the following criteria within each of our two main buckets:

Business Performance

  1. Return on equity
  2. Return on assets
  3. Operating margins
  4. Quarterly revenue growth
  5. Quarterly earnings growth

Sustainability/Dividends/Forecasts

  1. Debt-to-equity ratio
  2. Interest cover
  3. Dividend payout ratio
  4. Forward yield
  5. Annual EPS growth forecast

Once we have analyzed the two companies based on the first two buckets, we can then assess whether they represent good value based on the current prices of the two stocks. We use the following criteria to assess valuations on a relative basis.

Valuation

  1. Forward price to earnings ratio
  2. Price to book value ratio
  3. Enterprise value to EBITDA
  4. Price to 3 year average free cash flow ratio
  5. 5 year price to earnings growth ratio

So, for example, a company that performs well compared to its rival on the first two buckets (business performance and sustainability/dividends/forecasts) and that is undervalued relative to its peer (based on the third bucket: valuation) could outperform its competitor going forward.

The table below provides the data that we will use to analyze Comcast and DIRECTV (DTV) for the first two buckets.

Stock

Comcast

DIRECTV

Business Performance

Return on equity

14.86%

N/A

Return on assets

5.74%

15.67%

Operating margins

21.44%

16.90%

Quarterly rev. growth

3.50%

3.60%

Quarterly EPS growth

14.90%

-18.70%

Sustainability/Dividends/Forecast

Debt to equity ratio

87.19%

N/A

Interest cover

5.76

5.59

Dividend payout ratio

37.00%

N/A

Forward dividend yield

1.70%

N/A

Annual EPS growth forecast

11.60%

13.24%

Click to enlarge

The results from the first two buckets highlight that there are several key differences between the two companies. Indeed, DIRECTV has negative equity, and so its return on equity figure is negative, while Comcast is able to post an attractive figure for return on equity of 14.86%. This is fairly impressive, given that Comcast has only moderate levels of financial gearing, as highlighted by its debt-to-equity ratio being 87.19%. Furthermore, both companies appear to have adequate headroom when servicing their debt, with interest cover being ample at 5.76 for Comcast and 5.59 for DIRECTV.

While quarterly revenue growth was similar for both companies last quarter, their respective EPS growth was markedly different. Indeed, Comcast was able to grow EPS by 14.90% last quarter, while DIRECTV saw its bottom line shrink by 18.70% as the company continues to revalue downwards its subsidiary in Venezuela.

Meanwhile, Comcast's dividend yield of 1.7% has the scope to increase significantly, given that the company's payout ratio is just 37%. DIRECTV does not pay a dividend, with the company choosing to reinvest all of its profit in the business. This could be paying off, since its forecast EPS growth rate next year is slightly higher than that of Comcast, with the former expected to increase the bottom line by 13.24% next year and the latter by 11.60%.

Despite this, we feel that Comcast edges out DIRECTV in the first two buckets, owing to its much stronger quarterly earnings numbers, as well as its positive book value and dividend payments.

Valuation

Due to its slight outperformance of DIRECTV in the first two buckets, we would expect Comcast to trade at a small premium. Let's see if it does.

Stock

Comcast

DIRECTV

Valuation

Forward price to earnings ratio

16.84

12.97

Price to book ratio

2.77

N/A

EV/EBITDA

8.36

7.75

PEG

1.10

1.67

Price to free cash flow ratio

18.22

18.48

Click to enlarge

While Comcast trades at a significant premium in terms of the forward P/E ratio (16.84 versus 12.97 for DIRECTV), the 5 year PEG ratio paints a different picture of the two companies' valuations. Indeed, Comcast appears to be far more attractive than DIRECTV in terms of the PEG ratio, with its PEG being an impressive 1.10, while DIRECTV's is 51.8% higher at 1.67. Furthermore, we expected Comcast to trade at a premium on the price to free cash flow ratio (which it doesn't) and anticipated its EV/EBITDA ratio being higher relative to DIRECTV than it is, given the company's stronger performance in the first two buckets. As a result, we feel that Comcast could outperform DIRECTV going forward.

Conclusion

Comcast is a high quality company that posted impressive scores on The Team Money Research Rating System. Although its scores were not head and shoulders above those of DIRECTV, we did feel that the company edged the scoring in the first two buckets owing to its positive book value, payment of a dividend and stronger quarterly earnings figures. Furthermore, its relative valuation indicates that it is more attractive than DIRECTV right now. As such, we believe that Comcast could outperform DIRECTV going forward.

Here's another Head-To-Head article that appeared on Seeking Alpha and that you may find useful. Click here to take a look.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.