Comcast: Market Leader And About 15% Upside To Fair Value

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About: Comcast Corporation (CMCSA)
by: Frank Isaksen, CFA
Summary

Solid and sustainable cash return to shareholders.

Somewhat attractive valuation and risk-return.

Share price close to all-time high.

Summary

Comcast Corporation's (NASDAQ: CMCSA) share price is getting close to the all-time high at about $64. Fair value seems to be about 15% higher, that is, closer to $75. Comcast is the largest broadcasting and cable television company in the world measured by revenues. Comcast also has higher margins than most of its competitors. Comcast seems to offer a somewhat attractive risk-return when the share price is below $64, but technically the share price may have difficulties breaking the old all-time high.

Forecast assumptions

I have created a forecast based on Comcast's historical financial performance and current consensus forecast. I have used the free Equity Analysis Model from www.SimulationFinance.com to generate this analysis, and the analysis is available here. I have used this Google Spreadsheet to extract historical financial data for Comcast from Google Finance, and I have used Comcast's investor relation page. The below image shows the historical financial data pasted into the Equity Analysis Model.

I then clicked the Generate forecast button to create an analysis based on extrapolation of the historical development. This will create forecast assumptions based on the historical trends. It will also calculate historical standard deviations and correlations used in the analysis to create fan charts and distribution charts. I will change some of the forecast assumptions further down in this analysis.

After having automatically generated forecast assumptions based on the historical development, I then manually changed some forecast assumptions to reflect the consensus forecast. The below image shows the consensus forecast from 4-traders.com.

The below images from the Equity Analysis Model shows the forecast assumptions used in the calculation. The forecast assumptions are adjusted using the Adjust button to reflect the current consensus forecast.

I have assumed that the EBITDA margin stays at 33.9%. This is somewhat higher than the average experienced EBITDA margin the last 2 years. It is equal to the consensus forecasted EBITDA margin in 2018.

In the below table, I have summarized the 2015 EBITDA margin for some media companies. Comcast, Disney (NASDAQ: DIS), Twenty-First Century Fox (NASDAQ: FOX), Time Warner Inc. (NASDAQ: TWX), CBS Corporation (NASDAQ: CBS), Netflix (NASDAQ: NFLX), Time Warner Cable (NASDAQ: TWC), and Charter Communications (NASDAQ: CHTR). Source: 4-traders.com.

Charter Communications and Time Warner Inc., the other 2 cable providers, have about the same EBITDA margin as Comcast. Charter Communications and Time Warner Inc. have just finalized their merger.

I have assumed dividends as 33% of net profit. The below chart shows the historic dividend development.

I have assumed quarterly capital expenditures of $2.3 billion in Q2 2016, and growing with $25 million each quarter, which is somewhat above consensus forecast.

I have assumed repurchase of 20 million shares each quarter. The below chart shows the historical development in outstanding number of shares.

Forecast

All the tables and charts below are from the analysis calculated in the Equity Analysis Model. The below table shows my forecast on an annualized basis.

Consensus forecasted revenues in 2018 is $87.3 billion and my revenues forecast for 2018 is $87.3 billion. Consensus forecasted net income in 2018 is $10.3 billion and my net income forecast in 2018 is $10.3 billion. The negative financing cash flow is from assumed dividend and share repurchase. The below chart shows the historical and the assumed future revenues and EBITDA. Historical data with dark columns and the forecasted data with light columns.

The below chart shows the historical and the assumed future earnings per share and assumed future dividends.

The below chart shows the assumed future yearly earnings per share and cash earnings per share.

The below chart shows the assumed future yearly price over earnings per share and price over cash earnings per share.

Valuation based on discounted cash flow

Based on the discounted cash flow valuation method, assuming a weighted cost of capital of 8% and perpetual growth of 3% from the end of 2021. The below chart shows the calculated fair value per share based on the assumptions above. That is, the fair value per share is about $75.4 (the column to the right). Current share price is about $63.

Confidence analysis

The Equity Analysis Model allows to include uncertainty assumptions in the forecast, that is, standard deviations and correlations. In this example, they are automatically calculated based on the historical financial data. Calculated quarterly historical standard deviation in revenues is 2.76%. Calculated quarterly historical standard deviation in costs is 3.88%. Calculated correlation between revenues and costs is 0.85. The Equity Analysis Model calculates multiple scenarios based on these standard deviations and the results is available in fan charts and distribution charts.

The below chart shows the historical and the assumed future revenues with uncertainty assumptions.

The black line shows the historical development, and the dotted line shows the main case assumed future development. The darkest blue area shows the range containing 75% of the calculated outcomes. The two darkest blue areas combined shows the range containing 90%, and the total blue area shows the range containing 95% of the calculated outcomes.

The below chart shows the assumed possible development in the EBITDA margin.

The below chart shows the assumed possible development in earnings per share.

The below chart shows the calculated fair value per share range. The percentages on top the columns show the accumulated probabilities from the left.

That is, the value per share range is between $47.62 and $109.65 per share. The majority of the fair value calculations are between $60.03 and $84.84. This latter range captures about 94% of the calculated outcomes.

The horizontal axis shows the distribution of calculated fair value per share, and the vertical axis shows the probability of each outcome. The percentages on top of the bars show the accumulated probability, starting from the left. That is, there is about a 13.3% probability that the fair value per share is below $66.23. Current share price is about $63.

Valuation based on the dividend growth model gives about the same fair value as valuation based on the discounted cash flow model when the dividend is adjusted to include share repurchases.

Valuation if lower EBITDA margins

To test the valuation for sensitivities in future margins, I update the forecast assuming that the EBITDA gradually decreases to 29% from the current level of about 33.9%. Consensus is forecasting an EBITDA margin of about 34% in 2018. The image below shows the assumptions change made.

The below chart shows the new assumed possible development in the EBITDA margin.

The below chart shows the new assumed possible development in the earnings per share.

The below chart shows the new calculated fair value per share based on discounted cash flow. The fair value per share is about $58.84. Current share price is about $63.

The below chart shows the new calculated fair value per share range.

That is, the value per share range is between $35.72 and $92.95 per share. The majority of the fair value calculations are between $47.16 and $64.34. This latter range captures about 84% of the calculated outcomes. In this example, there is about 47.4% probability that the fair value per share is below $58.61. Current share price is about $63. That is, if one assume that Comcast's EBITDA margin is heading towards 29%, the share price seems overvalued.

Possibility to increase share repurchase

The below chart shows the assumed possible development in financial leverage measured with Net debt/EBITDA assuming the EBITDA margin remains at 33.9% and Comcast repurchases 20 million shares each quarter at current share price.

The below chart shows the assumed possible development in Net debt/EBITDA assuming Comcast increases repurchases to 35 million shares each quarter at current share price.

That is, Comcast may be able to increase share repurchases without increasing the financial leverage.

Summary

Comcast is the largest broadcasting and cable television company and it enjoys healthy margins. Charter Communications and Time Warner Cable have just merged, and how this will affect cable prices and profitability is still uncertain. The valuation is relatively sensitive to a falling EBITDA margin. Assuming current profitability remains relatively unchanged, it seems that Comcast can increase share repurchases. Comcast seems to offer a somewhat attractive risk-return when the share price is below $64, but technically the share price may have difficulties breaking the old all-time high.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TWX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.