Comcast Stock: Bottom-Fishing Buying Opportunity Appears (NASDAQ:CMCSA)

Comcast Profits Rise 26 Percent In Fourth Quarter

Justin Sullivan

Thesis

Comcast Corporation (NASDAQ:CMCSA) stock has continued to come under significant selling pressure, as it gave up all its August gains following a Q2 earnings release that initially disappointed the market.

Therefore, the market appears to be tremendously pessimistic about CMCSA. The market’s concerns stemmed from the multitudinous headwinds Comcast is facing relating to worsening macroeconomic challenges, competition, and a discernibly slowing broadband segment.

While we think these concerns are justified, we also consider that CMCSA’s valuations have been adequately de-risked to reflect these complexities. Moreover, we gleaned that CMCSA’s price action suggests that it’s likely consolidating and forming a long-term bottom, in line with our expectations of a significant trough in its valuations.

Therefore, we urge investors to look beyond the current mess and pessimism in CMCSA, as the company also repurchased a record level of its stock. Consequently, it drove up its buyback yields markedly, coupled with solid dividend yields. Therefore, we are encouraged by the strength of Comcast’s underlying business model, which has proved its resilience. While management has to continue executing through a challenging business and macro environment, we are confident that these conditions should normalize over time.

Accordingly, we rate CMCSA as a Buy and urge investors to capitalize on CMCSA’s long-term bottom to add more exposure.

Comcast’s Critical Cable Segment Remains Robust

Comcast broadband customers segment change %

Comcast broadband customers segment change % (Company filings)

As seen above, Comcast registered a 2.5% YoY growth in its broadband customers’ segments in Q2. However, its QoQ growth was essentially flat, which worried the market that Comcast’s critical growth driver showed signs of weakness.

Management’s commentary on the normalization of its broadband growth highlighted a reversal of pandemic-driven tailwinds, coupled with competitive challenges from fixed wireless access providers. However, churn metrics remain robust; therefore, Comcast has not seen a secular decline in its underlying performance.

Comcast Cable Communications adjusted EBITDA margins %

Comcast Cable Communications adjusted EBITDA margins % (Company filings)

We are also confident that the underlying performance in Comcast’s Cable Communications segment remains robust. For example, it posted an adjusted EBITDA margin of 44.9% in FQ2’22, above last year’s 44.2%. Also, its margins profile has improved over the previous three years, despite the slowdown in new connects, impacting its broadband customers growth. Therefore, we are sanguine about Comcast’s ability to navigate its near-term headwinds. As such, we are not unduly concerned for now with the structural impact of more intense competition on its operating model.

Normalization Should Carry On, But CMCSA’s Valuations Have Been De-risked

Comcast revenue change % and adjusted EBITDA change % consensus estimates

Comcast revenue change % and adjusted EBITDA change % consensus estimates (S&P Cap IQ)

Notwithstanding, the consensus estimates (bullish) suggest that Comcast’s growth normalization should continue through FY23, as the Street remains tentative over Comcast’s resilience. Barclays (BCS) was particularly concerned with Comcast’s forward growth trajectory, as it articulated:

The cable companies are likely past peak growth. Cable providers could see flat growth in 2023, and potentially negative after that. With unit growth now flat to up by low single digits and pricing up only in the 3%-4% range for broadband at best, cable companies may start looking a lot more like telecom companies. – The Fly

Therefore, we posit that the market has adjusted its expectations for Comcast to reflect such potential structural headwinds that could impact its growth cadence moving ahead. We also think it’s justified for investors to factor in an appropriate discount to its valuations. The current climate seems too complex to parse the impact of its competitive implications, given the macro headwinds impacting its business.

CMCSA EV/NTM EBITDA valuation trend

CMCSA EV/NTM EBITDA valuation trend (koyfin)

We gleaned that CMCSA’s NTM EBITDA multiples have likely reflected the market’s concerns, as seen above. CMCSA last traded at close to two standard deviations below its 10Y mean, which has consistently supported its recovery over time.

CMCSA TTM P/FCF valuation trend

CMCSA TTM P/FCF valuation trend (koyfin)

In addition, we also noted that its TTM free cash flow (FCF) multiples are also at the two standard deviation zones below its 10Y mean, corroborating our observation of its EBITDA multiples. Investors should note that Comcast is still generating robust FCF despite its current growth challenges.

CMCSA TTM buyback yield %

CMCSA TTM buyback yield % (Company filings)

Also, we observed that the company had repurchased $10B worth of shares over the past twelve months (TTM). As a result, its TTM buyback yields have surged to 6% in FQ2, suggesting that management can confidently deploy its robust cash flow generative capability to return substantial value to shareholders.

Is CMCSA Stock A Buy, Sell, Or Hold?

CMCSA price chart (monthly)

CMCSA price chart (monthly) (TradingView)

We are confident that CMCSA has likely formed its long-term bottom in July, as seen above. While CMCSA has given back its August gains, as the market pulled back markedly, we are optimistic about its current bottoming process.

Therefore, we postulate that the downside risks seem limited moving ahead, coupled with an attractive valuation that has been de-risked adequately.

We rate CMCSA as a Buy and urge investors to capitalize on August’s weakness to add more positions.

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