Comcast Stock Too Cheap to Ignore

Let’s face it, those stocks once thought to be “safe” no longer are. Over the last two months even the most strident of bulls has lost at least some of their confidence. Consumers are cash strapped, unemployment is rising and the stock market has tanked. So, knee deep in pessimism, now is the right time for contrarian investors to look for buying opportunities as investment gurus Warren Buffett and Dr. John Hussman have recently written. The old adage, “be greedy when others are fearful and fearful when others are greedy” has worked pretty well for the Sage of Omaha over his illustrious career. I know I would not bet against him.

We would like to highlight Comcast (CMCSA) as a stock that, if you are able to buy and hold, will almost certainly be considerably higher in a few years. Not surprisingly, Buffett’s Berkshire Hathaway (BRK.A) was a holder of Comcast at the time of its last annual report in August. Comcast is the nation’s largest cable and internet provider. Video content has traditionally been a cornerstone of the Comcast product set, but the company has made great strides in expanding its telephone and internet presence. Just this week the company announced that it is going to roll out faster internet for customers in select areas. As of right now, the extra speed will cost consumers nothing more than their old serve did. Comcast has seen decent sales gains through its bundling technique. Most major cable and phone companies are now offering some sort of bundling arrangement as a way to grab a larger share of the market. For more on this trend see Comcast Sees Increased Competition in Multi-Media Bundling.

Comcast Chart

We liked Comcast stock when it was around $18 in February (Comcast: A Stock We Love, A Company Most Hate), and now that the stock is trading around $14 we think it is Greatly Undervalued. For example, over the last ten years CMCSA has normally traded in a price-to-sales range of 2.1x to 3.5x, but the current price-to-sales is well below that range at 1.2x. Likewise, Comcast has a historically normal price-to-cash flow range of 7.8x – 13.4x. Currently, this valuation is more than 40% below the low end of the range at 4.6x. So, the valuation appears to be extremely favorable for the patient investor. We have a rationally expected price on CMCSA of $26 over the long term, if the valuation metrics were to come back in-line with past results.

No one knows when this market will bottom, but we think it is a very solid assumption that Comcast stock will recover when the broad market does. Comcast is financially strong and we expect that when it reports earnings on October 29 that this financial strength will be reflected in the results. Also of note for investors looking for income, Comcast has recently initiated a dividend which is meager but appears safe. Over the last 5 years, sales have grown at a growth rate of 14.3% and cash flow has also grown as well at 14.5%. Even if those growth numbers take a hit in the tough environment right now, we still think that Comcast shares have been pushed below a level that is warranted.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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