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Comcast Stock May Still Be Undervalued by 20%, Analyst Says

Comcast stock just got another booster, with an analyst upgrade to the equivalent of a buy rating on Thursday morning.

Oppenheimer’s Timothy Horan sees growing broadband revenue, expanding profit margins, and a low relative valuation as reasons to buy Comcast stock (ticker: CMCSA). Despite already returning about 35%, including dividends, in 2019, Horan estimates that shares are still undervalued by nearly 20%.

Comcast stock jumped 1.8% in Thursday trading, versus a 1.2% rise for the S&P 500.

The back story. Along with much of the media and telecom industry, Comcast entered the mergers-and-acquisitions fray in 2018. It first took on Walt Disney (DIS) in a bidding war for then-21st Century Fox’s entertainment assets, and then participated in an auction for European pay-TV operator Sky last fall. It lost the Fox properties but won control of Sky in a transaction valued at $46.1 billion including debt, acquiring its 23 million satellite-TV customers in seven European countries and two million subscribers for its Now TV streaming platform.

Investors weren’t sold on that acquisition at first—worried about its price and negative satellite-TV trends—and Comcast stock ended 2018 down 15% before roaring back this year. The stock’s rebound has been supported by solid results from the company’s core cable business, which is sold under the Xfinity brand.

Investors’ concerns about slowing economic growth, trade wars, and tumbling bond yields in 2019 have also made cable companies’ domestically-focused and recession-resistant business models and dividend-paying stocks particularly attractive. Comcast stock has returned 35.1% in 2019 through Wednesday’s close, including dividends. That compares with an 18.8% return for the S&P 500 index, 47.2% for Charter Communications (CHTR), 75.5% for Altice USA (ATUS), and a 17.8% drop for CenturyLink (CTL).

What’s new. Investors have gained a new appreciation for cable companies’ growing broadband internet businesses this year, even as cable TV subscribers continue to cancel en masse and leave their bloated bundles behind. Oppenheimer’s Horan sees that broadband strength continuing and supporting higher profit margins and lower capital expenditure requirements.

“The economics of unbundling will help margins as customers more often choose to buy broadband services as a standalone product from Comcast,” Horan wrote in a report on Thursday. “Cable margins should continue to expand as revenue mix shifts to higher margin broadband (estimated 70% adj. EBITDA margins) vs. video (estimated 20% margins).”

Horan sees Comcast pushing existing internet subscribers to higher-priced plans with faster data speeds up to 1 Gbps, which is already available in close to 100% of Comcast’s network. Whether those faster speeds are actually worth it for consumers is another matter. Charter plans to raise prices starting next year, and Horan expects Comcast to do so as well. He estimates it can increase its average revenue per user by 4% a year.

In Comcast’s NBCUniversal segment, Horan sees a strong 2020. The 2020 Summer Olympics in Tokyo next summer will boost advertising revenue at NBC, while the lead up to the U.S. presidential election will do the same at MSNBC. A promising movie slate including the next installments in the Minions and Fast & Furious franchises should grow revenue at the Universal film studio. NBCUniversal is also set to launch a new ad-supported streaming service early next year. Horan also predicts incremental subscriber gains at Sky, boosting margins there.

Looking ahead. Horan estimates a two percentage point expansion in Comcast’s earnings before interest, taxes, depreciation, and amortization, or Ebitda, margin this year followed by an additional 0.7 percentage point in 2020, to 32.2%. Meanwhile, he sees capital expenditures remaining steady while revenue grows 3.5% this year and 4.5% next year.

The result is a 15% jump in Comcast’s free cash flow in 2020, to an estimated almost $19 billion before distributions, which Comcast can then use for dividends, buybacks, or paying down debt. Horan’s $54 price target is based on a 7.5% free cash flow yield on his 2020 estimate. At its recent $45.52, the stock trades for a 9% FCF yield, while Charter stock trades for a much richer 6.5%.

Several other Wall Street analysts have also upgraded Comcast stock this year. Overall they’re bullish on the stock; 85% have a Buy or equivalent rating, while 15% recommend a Hold. No analysts rate Comcast Sell. Their average price target is $49.84, over 9% above Wednesday’s closing level of $45.52. The stock pays a 1.8% dividend yield.

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