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Here’s Why Comcast Stock Is a Buy No Matter Which Bidding War It Loses

Will Healy

Comcast Corporation (NASDAQ:CMCSA) finds itself in an epic battle with rivals in the race to acquire more content. The Philadelphia-based telecom and media conglomerate needs new sources of revenue as Americans cut cable and embrace much cheaper streaming services. The increasing size of the bids has concerned Comcast stock investors and not without reason.

As the company’s debts mount, fears of overpaying begin to surface, but now is not the time to panic. Given Comcast’s balance sheet, the bids likely involve competitive strategy as much as they pertain to gaining control over more content.

Comcast’s Content Focus

Although financials appear stable for Comcast stock, the company’s most important struggle involves strategic positioning. As the second-largest provider of pay TV services in the U.S., the cable-cutting trend has caused serious concerns. Since the company also provides internet services, the trend has jeopardized its growth more than its survival.

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Fortunately, Comcast also has worked to acquire content. It purchased NBC from General Electric Company (NYSE:GE) in 2012 and even has attempted to buy Walt Disney (NYSE:DIS) and Time Warner in the past.

Currently, the company finds itself locked in a battle with Disney to acquire most of the media assets of Twenty-First Century Fox (NASDAQ:FOXA, NASDAQ:FOX). Comcast also finds itself locked in a struggle to purchase the portion of European broadcaster SKY PLC (ADR) (OTCMKTS:SKYAY) that Fox does not already own.

Bidding Wars and Comcast Stock

Amid all of the bidding, Comcast has fallen 28% from its 52-week high. Winning one or both of these bids will strain its balance sheet. Both of its short and long-term debts amount to around $66.7 billion. Acquiring Sky would add $30.7 billion to that debt load. Rumors have surfaced that Comcast intends to offer $90 billion for the portion of the Fox empire up for sale.

Keep in mind, Comcast currently holds about $69.5 billion in stockholders’ equity. Its market cap stands at around 2.17 times that amount, about $150 billion. If Comcast won both of these bids, that would bring its long-term debt to over $187 billion if the bidding war stops here.

Given the dangers to the balance sheet of winning both bidding wars, I do not think Comcast will win both bids. I also doubt that winning both bids is the company’s true intent.

Perhaps the true strategy involves making sure they acquire content assets of some type. It could also include pushing one of these companies to overpay for the assets, so Comcast emerges with the stronger balance sheet.

For this reason, I think investors should assume Comcast will emerge from the merger battles with a stable balance sheet. Assuming Comcast’s balance sheet remains solid, Comcast stock begins looking attractive.

The forward price-to-earnings (PE) ratio stands at about 13. Analysts also predict the company will see at least three years of double-digit earnings per share (EPS) growth. Comcast also enjoyed double-digit EPS growth for four of the past five years. Paying 13 times earnings appears reasonable for such a growth scenario.

The Bottom Line on Comcast Stock

Given bid sizes and company debts, Comcast might be seeking financial leverage compared with its peers as well as more content. Gaining such content involves increasingly costly bidding wars with both Fox and Disney.

Comcast’s debt levels almost match stockholders’ equity. Winning both the Fox and the Sky bids would place a crushing burden on Comcast. For this reason, content control is unlikely to serve as the company’s only goal.

Also, Comcast stock has fallen to a low valuation despite double-digit profit growth. Assuming Comcast emerges from these bidding wars with a stable balance sheet, the stock should remain in a solid position despite any short-term successes or failures in purchasing content.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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