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Is Comcast (CMCSA) Stock a Buy For 2021?

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Alex Smith
·7 min read
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Fiduciary Management, Inc recently released its Q3 2020 Investor Letter, a copy of which you can download here. The FMI All Cap Fund posted a return of 6.2% for the quarter, underperforming its benchmark, the Russell 3000 Index which returned 9.21% in the same quarter. You should check out Fiduciary Management’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the Q3 2020 Investor Letter, Fiduciary Management highlighted a few stocks and Comcast Corp (NASDAQ:CMCSA) is one of them. Comcast Corp (NASDAQ:CMCSA) is a telecommunications conglomerate company. In the last one year, Comcast Corp (NASDAQ:CMCSA) stock gained 14.6% and on January 8th it had a closing price of $51.54. Here is what Fiduciary Management said:

"Description

Comcast Corp. is the combination of Comcast Cable, NBC Universal (NBCU), and Sky PLC (Sky). Comcast Cable is the #1 provider of fixed broadband service in the United States (26 million residential subscribers) with an advantaged topquality network and a strong and growing business services offering. NBCU and Sky are leading multinational media conglomerates that own strong libraries of existing content and together, invest over $23 billion in content annually. In 2019, revenue contributions were as follows: Cable (53%), NBC Cable Networks (11%), NBC Broadcast Television (9%), NBCU Filmed Entertainment (6%), Universal Studios Theme Parks (5%), Sky (18%), and Corporate & Eliminations (-2%).

Good Business

• Most of Comcast Cable’s cash flow comes from recurring high-margin Residential Broadband and Business Services (not from Video). In 2019, these lines of business each reported over 9% revenue growth and combined for $24.3 billion in revenue. Second quarter 2020 residential net subscriber additions (+232,000) were the strongest 2Q net additions in thirteen years. For the fifteenth consecutive year, in 2020, Comcast is on pace to add more than 1 million broadband subscribers. Comcast Cable’s broadband-centric growth is roughly composed of >4% customer volume, 2-3% price and tiering, and 2% of lost discounts due to unbundling. Comcast’s broadband network is top-quality (soon to be 100% DOCSIS 3.1) and we expect broadband subscriber additions to continue to be strong despite regional investments in 5G fixed wireless (a limited value proposition), as Comcast takes further share from disadvantaged DSL-like competition (25 million subscribers nationally), benefits from demographic tailwinds (younger households have higher broadband penetration), and continues to grow its network footprint (which is over-indexed to growing population centers) beyond 58 million homes passed. Comcast cable is likely to continue to win because its similarly-priced product really is superior (better speed, better reliability, and better extras like xFi WiFi management, Xfinity Flex, and the soon-to-be launched Peacock AVOD service). Comcast’s Wireless business (>2 million subscribers) should reach profitability in 2021. Underlying Cable returns on invested capital are rising.

• In 2019, Charter Communications Inc. (Comcast competitor) reported typical monthly consumption for broadband-only subscribers surpassed 450GB, which compared to about 8GB of typical monthly consumption of cellular wireless data. 5G mobile networks are likely to remain too capacity-constrained to offer suitable alternatives to cable broadband. Gradual build out of 5G fixed wireless may present a suitable alternative to cable broadband, but will suffer from difficult-to-solve technical challenges (range and reliability issues), will only be available in limited locations, will require huge fiber-centric investment on the part of carriers, and these build outs face similarly daunting overbuilder economics akin to U-verse, FiOS, Google Fiber, or others.

• NBCU and Sky are likely to face real challenges in parts of their respective businesses due to a changing media landscape, but they also possess real advantages, like strong libraries of existing content, significant annual content investment, a meaningful focus on live sports and news content, and the premiere #2 global theme parks business in Universal Studios.

• Comcast’s net debt-to-EBITDA1 (ND/EBITDA) leverage at year-end 2018 was above 3.3 times, but has now fallen below 2.7 times, on its way to Comcast’s traditional 2.0-2.25 times target leverage range (lower than peers) by early 2021.

Valuation

• At $43.50, Comcast trades at 13.9 times 2019 price-to-earnings (P/E) and 8.8 times enterprise value-to-EBITDA (2019). On a P/E basis, this appears attractive in absolute terms, is well below Comcast’s historical P/E multiple, and represents a substantial discount to the S&P 500.

• Bernstein recently estimated that $36 is the price investors are paying for Cable & Theme Parks while receiving the rest of NBCU & Sky for free. Additionally, at year-end 2019, noting significant value in Comcast’s investment portfolio (from Hulu, Atairos, and more), Morgan Stanley also recognized the strong enduring value (and growth) in NBCU’s Parks & Films divisions an investor receives at a significant discount to peers.

Management

• Brian Roberts, son of the late founder Ralph Roberts, became President in 1990, CEO in 2002, and Chairman in 2004. The Roberts family controls one-third voting interest in Comcast through non-traded B shares. Setting the Sky acquisition aside, we view the long-run Roberts track record as very good.

• Comcast’s divisional performance stacks up well against direct peers in most cases, supporting our view that Comcast possesses a deep bench of strong (though excessively compensated) executive leadership.

Investment Thesis

Over the past three completed years, pure-play Cable broadband providers (including Charter Communications and Cable One Inc.) have trounced the S&P 500, reflecting strong and durable growth in subscribers, rising margins, and declining capital intensity. Though all industry observers agree that Comcast’s Cable broadband business is top quality (#1), Comcast’s shares lagged the S&P 500 due to investor concerns over its media businesses and its acquisition of Sky. While we take no out-of-consensus positive view of NBC Broadcast and NBC Cable Networks, we see enduring value in the catalog at Universal Studios Film & Television, Universal Studios Theme Parks, and some of Sky’s true direct-to-consumer offerings. Comcast’s customers, content, and brands increase the likelihood of success of its streaming service, Peacock (which just passed 15 million sign-ups). Though the pandemic has pressured Comcast’s media businesses (weaker advertising, paused sports, and delayed film releases) and temporarily closed Comcast’s Theme Parks, its Cable broadband business has strengthened, and continues to grow and drive the bulk of Comcast’s value. As Comcast nears its target 2.0-2.25 times ND/EBITDA leverage range in early 2021 and restarts their share buyback, investor interest is likely to increase."

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Copyright: jetcityimage / 123RF Stock Photo

In December 2020, we published an article revealing that Longleaf Partners Fund, a Memphis-based fund under Southeastern Asset Management, is bullish on Comcast Corp (NASDAQ:CMCSA) stock. The investment firm believes that the stock is trading at a discount at the moment.

In Q3 2020, the number of bullish hedge fund positions on Comcast Corp (NASDAQ:CMCSA) stock increased by about 3% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Comcast's growth potential. Our calculations showed that Comcast Corp (NASDAQ:CMCSA) isn't ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:

Disclosure: None. This article is originally published at Insider Monkey.