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Comcast: Contrarian Play On Overdone Price Decline

Ziyaad Manie, CFA profile picture
Ziyaad Manie, CFA


  • Comcast shares dropped about ~8%, or ~$16bn in market cap value, post its counter-offer for Sky at a rather generous ~$41bn EV.
  • Given the headwinds in the pay-TV industry, I would definitely view the price as excessive and deserving of a negative market response.
  • However, the share price decline was overdone and Comcast shares now offer compelling value, with further upside should the deal not go ahead.
  • If the deal does go ahead, it should be earnings-neutral as well as assist with geographic diversification of the company – which is not a bad outcome, either.


Comcast (NASDAQ:CMCSA) is causing headaches for Disney (DIS) and Fox (FOX), having initially tried to counter the Disney offer for key entertainment assets held by Fox [inclusive of Sky (SKY)] and now making a play for Sky alone. Whilst there is certainly strong rationale for this given the importance of owning high-quality content, the seemingly inflated offer price has drawn the ire of the market and resulted in a sell-off in Comcast shares. This, in my opinion, has presented an opportunity for contrarian investors looking for a bargain asset.


Whilst, I think Sky is a solid asset with good content and market share in developed market economies, it is not an asset with highly attractive growth prospects. The effective ~12.2x EV/EBITDA multiple offered for the business is in my view at least 2 turns too high. Having said that, the transaction has not been accepted, and we may yet see a counter-offer from Fox, which should (hopefully) put an end to Comcast's interest.

Even if the offer is accepted, the Sky acquisition will likely be earnings neutral for Comcast, as they would have the gearing capacity to fully debt fund the deal, meaning the acquisition of Sky "should pay for itself" (calculations to be demonstrated later).

The existing Comcast business is trading attractively largely due to negative sentiment and concerns regarding the company's exposure to pay-tv in the US given chord-cutting trends. However, it remains a highly cash generative business with strong margins and should see robust growth from the high-speed internet, filmed entertainment and theme park segments to offset the decline in video.

Factoring in the Tax Cuts and Jobs Act, the adjusted 2017 EPS of $2.06 would be in the range of ~$2.35 and therefore means that Comcast is now trading at about ~15.5x on a trailing P/E basis, with a

This article was written by

Ziyaad Manie, CFA profile picture
Work in investment banking in a developing market economy. Invest long-only in a mix of ETFs, properties and fixed income with only high conviction stock picks to provide a tailwind to core portfolio.

Analyst’s Disclosure: I am/we are long CMCSA. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (22)

I own Comcast and wish it would stay at these prices little longer so that the buybacks it has, get more shares and we as the longtime investors shrink the pool of investors much faster. People who are in it for a quick buck, please look somewhere else!
Ziyaad Manie, CFA profile picture
I agree. The only time you should want the share price to be high is when you sell, otherwise it is beneficial for it to be lower. In 15-20 years time, DPS will be materially higher on a lower share count.
Comcast is oversold down 16% from its high. These entertainment stocks should be bought because people spend their earnings on entertainment.
Same broad based investment tenets apply to both companies. Comcast isn’t a bad company far from it. I think for long term retirement accounts will do well to own it at these levels. Personally I want my Management to be more opportunistic in terms of share repurchases and less dogmatic about empire building.
They are good and bad. Shareholders have no say and that’s a problem. Their payout isn’t 100% and they continue to de leverage. They should add one turn of leverage and buy back 20-25% of their share count or be opportunistic. The stock was down -13% last month! They are not in the market buying back stock. Investors are fed up hence the move. Only way to have a say with this company is to got with your feet.
Ziyaad Manie, CFA profile picture
Fair enough. I like that Comcast still have gearing capacity for M&A opportunities. The deal breaker is management - if you don't rate them then there is no point staying invested.
Actually Comcast is cheaper now but Charter is growing faster so on 2020 numbers both companies trade at less than 10x FCF per share. Charter is about 1/3 of a point cheaper.
Can’t look at EPS with charter as it is messy with integration and NOLs. FCF per share is a better metric. Comcast still is cheaper on a FCF per basis but there are multiple levers at charter besides valuation. Cost and cap ex are going to decline more rapidly in the coming years. Also there’s a massive pricing opportunity and gap between charter and Comcast in terms of broadband. That opportunity alone could be worth as much as the market cap.

My problem with the Roberts family is that they are not shareholder friendly. They do the bare minimum in terms of capital return. They don’t care if the stock price I materially higher 1-5 years out. Sure they are care that their stock price is higher in 20 years, but shareholders have to wait literally decades to see if their plan was correct. Too much can change in that time.
Ziyaad Manie, CFA profile picture
So far they have delivered pretty well over the long-term. They are also paying out almost all free cash flow to shareholders via dividends and share repurchases. 21% increase in the dividend in 2018. Just playing devil's advocate here, as personally think they are quite good.
For CMCSA, the 3-yr projected growth rate is 14% in EPS and we are paying 16 PE on 2018 earnings while for CHTR, the 3-yr projected earnings growth rate is 29% while we are being charged 65 PE on 2018 earnings, how does that make CHTR a better alternative?
I’ve owned but sold. I’m convinced this is a value trap. Management is the biggest risk here not cord cutting which is margin positive) 5G (which is more of an opportunity than threat) or any other sort of concern. I rolled it all into charter. Same dynamics (ex NBC but that’s only 20% of the business) but buying back 4% of the shares per quarter. They could buy back 70%+ of the market cap over the next 4-5 years. That’s shareholder friendly. The Roberts don’t care about the other shareholders that’s big difference.
Comcast is one of the worst stocks I've owned....want to sell at 41..to just break even...not shareholder friendly...
Ziyaad Manie, CFA profile picture
I do feel you need to be patient with value stocks. Value stocks outperform in bearish markets, and the market is not yet bearish, as Feb basically just wiped Jan's gains.

@MeowMix81. What is the major concern around the Roberts?
Interesting to note authors comment that Comcast could put $16B in market value back into the stock is the Sky deal falls through.

My guess that Murdoch is too toxic in the UK to get approval for Sky. He also seems to be winding down his involvement in micromanaging the Fox empire. Sky is an attractive asset.

I am long Comcast and bought the stock after it crashed. Seems to be stabilizing and now priced too low. Comcast has solid management. It does have some threat on losing cable revenues, but this is a fast moving business with many technolgy advances and it never stands still.

Apparently Comcast has worked out a deal with Roku, where an Internet/TV customer can stream all TV content with a Roku device and reduce the need for more than one set-top box. This means not having to rent out and maintain inventories of cable boxes which everybody hates and cost too much. They also have some opportunity to eat ADT's home security business and beat Amazon Google Apple with smart home technology linked to everything, in my opinion. It's an interesting stock.
Ziyaad Manie, CFA profile picture
What is your view of the Sky deal?

Otherwise, I agree with your general sentiments on Comcast. The Roku deal is interesting insight - where did you hear about this? Definitely good news for them.

Not sure what to think of the Sky deal except that Murdoch wanted it really bad and he has a nose for profit (even if it involved political corruption.) Considering how long Murdoch has pursued Sky and how many regulatory hurdles are involved, even if Comcast wins it might be a few years before the closing.

The ROKU agreement with Comcast Xfinity is still being tested in select markets and considered to be in Beta status. I think that this is a way for Comcast to fight back at cord cutters who resent having to pay for several set top boxes in a home. It makes cable TV more affordable compared to cord-cutting. See link below:

Ziyaad Manie, CFA profile picture
Thanks for the insight. Will monitor closely.
I've owned CMCSA for a long time and the stock has continually done nothing. I don't expect anything to change this in the future. Naturally I hope I am wrong in my opinion. Thank you for this nice posting.
Ziyaad Manie, CFA profile picture
I agree, it does need a catalyst to rally, but think patience will be key here as value is solid. Over time, the consistent dividend growth + share repurchases should reward shareholders.
"I've owned CMCSA for a long time and the stock has continually done nothing", that is a bold thing to say without any data!! Since 1995 to present , Comcast has delivered 12% per year (div reinvested), Since 2010-Present Comcast has delivered 22% per year (div reinvested). So not sure what long time means here for your holding. Even if you bought it at the height of 2000, it still delivered around 6% per year (div reinvested), which is higher than S&P 500 return of 5% for the same time.
anilshanbhag profile picture
I own Comcast and I want to tell you another similar story. Discover (DFS) was in similar straits. The business was improving, they were buying back stock and the stock wasn't moving. The stock just zoomed from $60 to $78. Comcast is in same boat. Cramer said MU was speculative at $40, then he says buy at $55; analysts have a herd mentality.
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