Comcast Corporation: A Good Buy After A Market Correction

Mar.12.12 | About: Comcast Corporation (CMCSA)

Comcast (NASDAQ:CMCSA) is one of the largest multimedia holdings in the U.S. The company operates in several segments. The cable services segment provides video services to 22 million households, internet services to 18 million households, and voice communication services to 9 million households. The company also operates the world famous broadcasting channels such as CNBC, MSNBC, and NBC. Universal Pictures is another brand under Comcast's umbrella. Besides the Universal theme parks in Florida and California, Comcast also runs Philadelphia Flyers and the Wells Fargo Center in Philedalphia. The multimedia titan was able to boost its earnings at double-digit rates in the past 5 years. Earnings increased by 16% in the last year alone. Since its dip of $20 in last August, the stock has been a huge performer, returning more than 40% in the last 6 months.

As of the time of writing, Comcast stock was trading at $29.84 with a 52-week range of $19 - $30. It has a market cap of $81.3 billion. Trailing twelve month P/E ratio is 19.9, and forward P/E ratio is 13.9. P/B, P/S, and P/CF ratios stand at 1.7, 1.5, and 5.8, respectively. Operating margin is 19.2% and net profit margin is 7.5%. The company has some debt issues. Debt/equity ratio is 0.8. Comcast recently boosted its dividends by 45%. Based on a quarterly dividend of 16.2 cents, current yield is 2.2%.

Comcast has a 3-star rating from Morningstar. Out of 6 analysts covering the company, 4 have buy and 2 have hold rating. Wall Street has diverse opinion about the company's future. Average five-year annualized growth forecast estimate is 17.5%. This is a reasonable estimate given the company's past 5 year EPS growth rate of 16.3%

What is the fair value of Comcast given the forecast estimates? We can estimate Comcast's fair value using discounted earnings plus equity model as follows.

Discounted Earnings Plus Equity Model

This model is primarily used for estimating the returns from long-term projects. It is also frequently used to price fair-valued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:

V = E0 + E1 /(1+r) + E2 /(1+r)2 + E3/(1+r)3 + E4/(1+r)4 + E5/(1+r)5 + Disposal Value

V = E0 + E0 (1+g)/(1+r) + E0(1+g)2/(1+r)2 + … + E0(1+g)5/(1+r)5 + E0(1+g)5/[r(1+r)5]

The earnings after the last period act as a perpetuity that creates regular earnings:

Disposal Value = D = E0(1+g)5/[r(1+r)5] = E5 / r

While this formula might look scary for many of us, it easily calculates the fair value of a stock. All we need is the current-period earnings, earnings growth estimate, and the discount rate. To be as objective as possible, I use Morningstar data for my growth estimates. You can set these parameters as you wish, according to your own diligence.


Historically, the average return of the DJI has been around 11% (including dividends). Therefore, I will use 11% as my discount rate. In order to smooth the results, I will also take the average of ttm EPS along with the mean EPS estimate for the next year.

E0 = EPS = ($1.50 + $2.15) / 2 = $1.83

Wall Street holds diversified opinions on the company's future. While analysts tend to impose subjective opinions on their estimates, the average analyst estimate is a good starting point. Average five-year growth forecast is 17.5%. Book value per share is $17.47. The rest is as follows:

Fair Value Estimator

V (t=0)



V (t=1)

E0 (1+g)/(1+r)


V (t=2)



V (t=3)



V (t=4)



V (t=5)



Disposal Value



Book Value



Fair Value Range

Lower Boundary


Upper Boundary


Minimum Potential


Maximum Potential


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I decided to add the book value per share so that we can distinguish between a low-debt and debt-loaded company. The lower boundary does not include the book value. According to my 5-year discounted-earnings-plus-book-value model, the fair-value range for Comcast is between $35 and $52 per share. At a price of $29.8, Comcast is trading below its fair value range. It has at least 16% upside potential.

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(Click to enlarge)


6 months ago, when I first estimated the fair value for Comcast, it was valued at a range of $26 - $43. At that time, the stock was trading around $20. Since then the stock returned almost 50%. Based on the most recent earnings report, the stock still looks pretty cheap. As the largest CATV provider, it is also trading at a discount compared to its peers. Its P/B ratio of 1.7 is much lower than the industry average of 3.6. Its strong cash flow is more than enough to cover both the dividend and the share buyback expenses. The company also spent more than $3 billion on debt repayment in the last year alone. Thus, the future looks pretty bright for the company.

From a technical perspective, there is a gap between $28 - $29 ranges. This gap has occurred when the stock jumped after reporting strong earnings for the last quarter. The year-end results suggested that the free cash flow was up by 67%. Not only, had the company announced a 44% increase in the dividends, but also a share buyback program of $6.5 billion. Therefore, the spike in share prices was well justified. However, with a relative strength index of 72, CMCSA is in the overbought territory. Therefore, while the long-term outlook is positive, I would wait for a pullback.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.