This 30% Undervalued Stock Is a Buy After a 7% Dividend Increase

Comcast CMCSA isn’t going to offer investors go-go growth. But given its competitive advantages, we expect this wide-moat company to effectively offset slowing broadband customer growth with steady revenue growth per customer. We think the market is undervaluing Comcast’s strong cash flow. The company just raised its dividend, too. Comcast stock is among our analysts’ top 33 undervalued stocks for the first quarter; it’s also among Morningstar chief U.S. market strategist Dave Sekera’s 7 Undervalued Stocks to Buy Now That Could Move the Market in 2024.

Comcast’s core cable business enjoys significant competitive advantages but has seen growth slow as fixed-wireless offerings have provided a viable option for a subset of customers. NBCUniversal isn’t as well positioned but holds unique assets, including core content franchises and theme parks. We don’t love the company’s strategy around Peacock, but we expect NBCU’s assets will play a significant role in the media landscape of the future. Overall, we expect Comcast will deliver only modest growth but with strong cash flow for the foreseeable future.

Key Morningstar Metrics for Comcast

• Fair Value Estimate: $60
• Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Uncertainty Rating: Medium

Economic Moat Rating

We believe Comcast possesses a wide economic moat that results from 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 or phone company. Across nearly half of the U.S., 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, 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. Cable networks like Comcast’s have provided a cost-effective platform to meet evolving customer demands.

Read more about Comcast’s moat rating.

Fair Value Estimate for Comcast Stock

Our $60 fair value estimate implies an enterprise value of about 8.8 times our 2024 EBITDA estimate. We expect only modest revenue growth over the next several years, as the declining traditional TV business largely offsets modest broadband customer gains, Peacock adoption, and expansion of the theme parks. We expect revenue growth in the connectivity segment will average about 1% annually through 2028, with very gradual acceleration over this period. Comcast should be able to offset lost television revenue with growth in broadband, commercial, and wireless services. We believe U.S. broadband customer growth will be minimal over the next five years as the company faces increased competition from the phone companies. Still, we expect network footprint expansion will offset competitive pressure, allowing for some customer growth. We expect competition will remain rational, allowing for steady price increases.

Read more about Comcast’s fair value estimate.

Risk and Uncertainty

We view regulation as the largest 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. Regulatory pressure to limit broadband pricing may grow over the longer term. Even if regulation never rises to the level of explicit price caps, the threat of this regulation could pressure Comcast to limit price increases. Also, technological obsolescence is always a risk.

Read more about Comcast’s risk and uncertainty.

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 gradually expand its own wireless network capabilities.
• Few companies have as many ways to monetize content investments. With its direct access to consumers across the U.S. and Europe, Comcast should be a destination for the best writers, directors, and actors.

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 any revenue growth in either of its two primary segments, the U.S. cable and media businesses.
• 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 $90 billion in debt, Comcast may not have the financial flexibility to pursue major strategic opportunities, like gaining scale for Peacock.

This article was compiled by Susan Dziubinski and Sylvia Hauser.