Comcast Stock Is a Buy

Comcast’s CMCSA core cable business enjoys significant competitive advantages but is likely to see growth slow as competition for customers heats up. NBCUniversal isn’t as well positioned but holds unique assets, including core content franchises and theme parks, that should help ease the transition away from the traditional television business. We expect Comcast will remain the dominant broadband provider in many parts of the country, thanks to a network that can be upgraded at modest incremental cost, and compete well in areas where the phone companies are building fiber. The high margins on internet access should offset the decline in the traditional television business, where margins have plunged in recent years. Overall, we expect Comcast will deliver modest growth with strong cash flows for the foreseeable future. The current annual dividend of $1.16 per share requires $5 billion annually, or about one third of free cash flow, providing ample strategic flexibility while maintaining a strong balance sheet.

Key Morningstar Metrics for Comcast

• Fair Value Estimate: $60
• Star Rating: 5 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Economic Moat Rating

We believe Comcast possesses a wide economic moat thanks to the strength of its core cable business. The majority of U.S. homes today can receive fixed-line internet access service from only two providers: the traditional cable company or the phone company. Across nearly half of the United States, that cable company is Comcast. The cost to enter this market is enormous. While technological developments have made it possible to build more efficient and reliable networks than legacy providers possess, deploying these technologies still requires heavy construction spending, while also overcoming the regulatory hurdles that municipalities often impose. Assuming successful network construction, entrants then face steep customer acquisition costs and startup losses as they attempt to gain share, typically with a modestly differentiated product in a rapidly maturing market. Several companies have attempted to enter the fixed-line market over the years, but failures far outnumber successes.

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Fair Value Estimate for Comcast Stock

Our $60 fair value estimate assumes Comcast remains the dominant internet access provider in the markets it serves, providing a solid foundation for the company to build customer relationships and deliver strong pricing power over the next several years. Our fair value estimate implies an enterprise value of about 9.5 times EBITDA and a free cash flow yield of 6% based on our 2023 estimates. We expect only modest EBITDA growth in 2023, with heavy Peacock investment largely offsetting roughly 3% growth in the cable segment. We expect free cash flow will increase about 20% versus 2022 as working capital normalizes.

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Risk and Uncertainty

We view regulation—and the environmental, social, and governance considerations it entails—as the greatest uncertainty facing Comcast. Broadband internet access is often viewed as a necessity to ensure inclusion in the workforce and access to education, while content produced at NBCU and Sky is scrutinized for its contribution to society. As a result, both areas tend to draw heavy regulatory and political attention. Technological obsolescence is always a risk. While we don’t expect 5G will radically alter the in-home internet access market, our assessment could be wrong. T-Mobile and Verizon are pushing fixed-wireless broadband access aggressively and are starting to capture a material portion of incremental market growth.

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Comcast Bulls Say

• Comcast’s cable networks provide a platform to easily meet customers’ growing bandwidth demands. This should drive steady market share gains, ensuring that recurring revenue and cash flow remain strong.
• Dense fixed-line networks provide Comcast with the opportunity to push deeper into the business-services market and play a crucial role in the deployment of 5G technology.
• Comcast has direct access to consumers across the U.S. and Europe, which should make it a destination for the best writers, directors, and actors, since few other companies have as many ways to monetize content investments.

Comcast Bears Say

• Comcast’s businesses are heavily exposed to the traditional TV model. As more consumers turn to online alternatives, the company will struggle to post revenue growth.
• Comcast’s reputation for customer service is poor at best. If 5G wireless provides a credible alternative, millions of customers are ready to switch internet access providers.
• With more than $95 billion in debt, Comcast may not have the financial flexibility to pursue major strategic opportunities in the future.

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