Comcast (CMCSA) Stock Valuation and Forecast | Cameron Stewart

[Music] hello welcome to rational investing my name is cameron stewart cfa thank you very much watch the channel i greatly appreciate all the comments all the subscribers all the support it's been a phenomenal year and i hope to continue next year this week we're going to look at comcast the media giant we're going to take a look at their financials we're going to see what they were doing in 2020 we're going to forecast a future and see what the economic return would be if we hold the asset over a decade now what we're going to do is with all with comcast and all of our investment we look for five key attributes for everything that would be top line revenue growth you got to have it earnings growth we look at earnings as ebitda must be there strong free cash flow less than three times debt to ebitda and a well-priced stock well-priced being debt to excuse me ebitda enterprise value to ebitda is what we look for all right behind me is the 10k for for comcast we're going to go through in a second but i want to get to a shareholder letter that's issued every year because i think it's really interesting behind me is the shareholder letter published by mr roberts that summarizes 2019 but also looks back for the full 10 years of the decade and i like the perspective both the 10-year perspective historically we can judge the acquisitions that they have made what has performed and then going forward what are they expecting there's a couple things i want to point out here first first is the acquisition that they made for nbc universal which is around the first page here today nbc universal is a uh is a recognized global leader of media and entertainment and its ebitda has nearly tripled since we announced the our intent to acquire majority stake in the company so there they bought the they bought a business and they've been able to grow it over time which is a good metric for what management's capable of then here in 2018 they bought the sky network right that's a british um british communications network with 20 24 million subscribers it actually owns or has has rights to the premier level soccer and f1 racing and they believe that they can grow this ebitda over the next multiple years they think they can double the ebitda which is great to see so there's two little comments in here it's really full of all kinds of materials definitely go read it and then he summarizes the last decade by saying that they have been up 542 percent being the s p 500 over the decade and when you look at their chart it absolutely goes straight up and kudos for them for being able to pull it off so it seems like from this from here the the chairman the ceo is talking about what they've done in the last 10 years they have definitely been able to roll up the business and expand let's go see how that's performed in the financials and we'll go from there behind me is the 10k for 2019 for the for the fiscal year and what i wanted to show is a couple slides in here that i thought were pretty interesting uh number i'm on page 39 of the 10k and it does a great job giving you three years of top line revenue earnings and then some per share data as well as you kind of look down the p l one thing i want to show is the adjusted ebitda they're calling it out nicely and they do a very good job going through each of the divisions within comcast and giving you revenue ebitda breakdown so you can do a sum of parts valuation if you want to summer parts would be looking at all the divisions they have look at the ebitda respectively for each division and then adding your own multiple to each division if you deemed what for whatever value you deem that enterprise and then adding it up that would give you the enterprise value uh that that we're showing you could subtract the debt that i have and you get market cap so it's a it's a good fun way to kind of come at value a different direction by doing a sum of parts i'm not going to do it now because it takes some time but i'll give you the the tools to do it which is basically right here on page 39 and you continue to scroll down and it breaks down each division as you scroll through so here you go here this this this section here this would be the cable communication section okay it gives you revenue breakdown it gives you the ebitda for the break for the actual divisions over time and you keep going you get each respective division that makes up the portfolio that is comcast all right before we get to the annual numbers let's take a look at q3 2020 financial results to get a gauge for what we believe 2020 will look like we'll then take that annualized 2020 number put it into our economic model and then forecast forward to see what this value might be over the long term and i want to say that the the the comcast group does a good job breaking down earnings and revenue by division as well as even giving us a stack up for ebitda which is what we look for in earnings and you can see it right here adjusted ebitda they're calling it out on the statement and one thing i want to show you is this here the reduction in uh ebitda year over year to date q3 2020 eight and a half percent drop so we're going to use that eight and a half i even moved up to ten percent reduction in ebiddal from 2019 to 2020 in our forecast model so we try to build a little cushion in here and what this year 2020 is going to look like going forward the other thing i want to talk about really quickly and i'll get to the numbers uh they recently launched mid 2020 their nbc universal's online subscription program called peacock they signed up in q2 when it launched with 15 member 15 million members fast forward three months into q3 now they have 22 million members right there so that's a 46 growth rate in three months of having that membership program which i think of the subscription program which is very good growth and i don't think they're getting credit for that that the possibility there but uh let's go to the actual financials take a look at what they've been doing historically what we think the value might be all right let's pick up as we always do with revenue so as you can see revenue here 55 billion dollars 55.8 billion these are all million usd so 55.8 billion in 2011 has grown to 108 billion dollars of revenue over this nine year period period of time that's a nine percent excuse me eight year period that's a nine percent annualized growth rate which is a strong single digit number and for sure it's a big company it's a nice number to have earnings our metric for earnings is ebitda ebitda has grown from 18 million to 20. there's 34 18 billion to 34 billion dollars over that same time period that is an 8 growth rate which is a strong single digit growth rate which is very nice again for such a big company i was also surprised i did not realize that they have breached the hundred billion dollar mark in revenue that's a tremendous amount of jack and a lot of their customers are subscribers in some fashion either cable with cords or online with peacock and so forth so i think that stickiness bodes well for this number and you can see it has grown every single year a couple acquisitions here and there definitely boost that number but they are moving that needle north which is really nice to see and overall i'm surprised just how large comcast is i did not know that okay revenue ebitda definitely check the box they're growing let's look at enterprise value and debt so we'll start with enterprise value like we always do with debt this is short-term long-term debt plus uh capital lease obligations 39 billion dollars to 111 billion dollars that's a big increase over time and it should be concerning to us because it's roughly two and a half uh two and a half almost three times growth rate over a period time when ebitda ebitda has gone from 18 to 34. so remember ebay does pay has to pay back this debt so the higher this goes it's being sucked up by here to pay for it so we want to keep those metrics i want to look at those the combination there but let's finish the table and finish off ebitda it's gonna be enterprise value so debt is up less access cash excess cash they used to have on the balance sheet it has gone away so um they've they've deployed the excess cash in acquisitions which is reduce this number it's also increased this number market cap market cap is shares outstanding times average share price i'm using december's average because that's their fiscal year end when these numbers are reported so i use that to calculate market value i add this bless that plus this i get this this is the enterprise value that is the entire business debt and equity combined in one single unit what is that worth that's the enterprise value and that has gone from 103 billion dollars to 316 billion dollars over that period of time okay now here's where it gets fun we've got revenue ebitda enterprise value and debt let's look at some metrics and see what the value of this business might be the first one we're going to do we're going to look at is debt debt right that's are the risk of bankruptcy as debt gets too high us as equity owners if you're buying the stock the debt guys are all in front of you if something bad were to happen and you had to go into bankruptcy or file some sort of restructuring the debt gets paid first the stock owners get the very last money if it's even there so you always want to make sure you're smell checking how much debt is in front of the business all right and we do that by we looking by looking at this measurement of debt to ebitda and you want less than three times debt to ebitda that's that's generally where senior debt will play a bank like jp morgan wells fargo they will lend three times ebitda on a business so three times 18 that's how much debt they're willing to give after that it becomes much more expensive or or begins to get more expensive the more debt you need because each layer of debt is added risk of of default but you can see here that their debt rating has gone from 2 to 3.3 as they've taken on more debt for acquisition so 3.3 is definitely above our mark but it's not dramatically above and it looks like it's coming back down when i read some of their information they are targeting to lower debt in the next in the coming years as they pay off the big acquisition they made uh back in 2018 when they bought sky okay so debt it's kind of like right there technically doesn't check the box but it's so close i'm going to go and check that box uh but barely ebitda ebitda to excuse me enterprise value to ebitda is our metric of value it's basically a payback period uh if if i'm if this is the value that i can buy the business at right now 316 billion dollars is the value of the company the price of the company excuse me like that price of the company and i know the company generates 34 billion dollars in annual earnings and that earnings tends to be fairly constant that's basically a payback period if i bought it now nine years from now this business will generate enough cash to essentially buy itself that's a payback period and it's incredibly important because this cash this earnings will will translate to cash which is what we buy and it's also used to pay back debt which is an obligation that must be repaid so it's very important and what you see here is it's low single digit right up to 9.9.9 where it's currently sitting at in my opinion this is incredibly cheap certainly at 5.7 it's absolute steel but a hundred billion dollar company that's generating 34 billion dollars of annual ebitda trading at 9.9 times is very cheap consider disney the walt disney company has less revenue than a hundred billion by the way so these guys are larger than disney disney's trading it we'll look at disney a second we're gonna get there one second but uh just in terms of cheapness i think there's some i think there's a lot of value here and what i like about it is your downside is kind of limited if you look at this range aside from this one anomaly this range doesn't move too much it's not like this nine is gonna go to a five anytime soon and that's downside protection for you as an equity investor which i like all right what i wanted to show you i brought it up earlier i wanted to show you just quickly where we are in this market because the market's getting a little crazy and i want to smell check value that's what we're trying to do not get our not get ahead of our skis the walt disney company right now is trading at 38 times ebitda they make 65 billion dollars a year in revenue this company makes 80 108 billion dollars of revenue and is trading it nine times ten times that's a market remarkably discounted value given the growth they have in peacock and some of their subscription services so disney definitely a premium there fox very cheap i didn't dig into it discovery very cheap didn't dig into it either netflix very expensive at 60 times and charter looks fairly valued to me in my book again i haven't dug through the cash flows there or the balance sheet that's just a quick smell check of enterprise ebitda for a benchmarking exercise the next thing i wanted to cover is is the debt so we identified that the debt here at 111 billion dollars is too high we need three times ebitda or lower so what we're saying is they're going to have to outlay cash to buy that debt down that cash means they can't pay it to us as dividend so we're going to lower the cash flow forecast as they buy that down how far do we lower it this is what we do i'm taking last year's ebitda 34 billion dollars this is my assumption i'm putting a three times cap on debt i'm saying they have to have less the maximum debt of 3x that's the maximum debt of 1.2 excuse me 102 billion dollars they currently have 111 call it 112. that's a 9.7 billion dollar buy down they have to do when i look at their cash flow statement we'll get we'll get there in a second last year in 2019 they made a roughly 5 billion paid down of debt so i'm saying they can do that again and they're going to do it two years in a row to buy down current level of debt to where they need to be so we're going to haircut cash flow forecast buy that amount because they have to buy down the debt if they actually do it that's their business but for us i want to make sure the numbers smell checked it's a good investment hurting cash flow by this before we buy in all right let's take a look at cash flow my favorite statement your favorite statement everybody loves the cash flow statement uh so let's look at it cash flow from operations that's the first third of the cash flow statement the best third the operating third they have gone from 14 billion dollars to 25 billion dollars optimization of cash flow over that time period that's an eight percent annualized growth rate which by the way does tails extremely nicely during the dog growth rate what does that mean that means that what they what they produce in the in the p l the earnings that they that they that they that they represent the shareholders when they fire the statements that means they're representing themselves in cash that they're turning their earnings into cash that the earnings aren't necessarily fake or or non-cash items we want to see that the next thing i look for is capex capex is the money they have to put back in the business to sustain and to grow it could be new erp systems it could be new buildings to expand for personnel and grow it's not big acquisition so if they if they when they bought sky it's not in here if they bought nbc universal from from ge almost a decade ago that's not in here but this is this has some growth in it but it's mainly uh systems and and maintenance cap but they spent 11 billion dollars it's up from 5.3 billion what i like to look at is this spread if they generate 25 billion dollars of cash cash money from operations and it's sitting in the bank at the end of the year management sitting around the table says what do we want to do with this 20 25 billion dollars that piled up from being successful at doing what they do i know let's reinvest in the business for some growth to to maintain our systems okay there's 11 billion dollars now this difference was that 14 billion mental math quickly worked 14 billion dollars left on the table after paying for maintenance capex and some growth money what do we do with it well we got to make a little bit of debt payment this is what i was saying with five billion dollars that they paid down debt the prior year 5000 so they had 14 chunked down another five for debt they get 9.6 billion call it 10 billion dollars of cash money sitting on the table when it's all said and done this is what we're buying when i take a look at the shares and i divide this cash by this this is the fir free cash flow per share number that you get every single time you buy a share two point two dollars and twelve cents that's a lot the next thing i want to go through is the shares outstanding this is important you buy a share you hang on to it you buy it right now or you buy it back then let's say take that back then there were 5.4 billion other shares outstanding and your percentage ownership the one share you had was one 504 a billionth of a percentage ownership of the business okay so you held your you held your share over time and time has moved on and as the company has produced cash flow and they have cash money sitting on the on the table after debt service they've also chosen to buy back shares and cancel them that has driven this number down steadily from 5.4 billion to 4.5 billion that's roughly a 1 billion dollar reduction suffering from billy a one billion share count reduction over time um and there's there's roughly a two percent drop in shares outstanding which is fantastic so that means that you're one and five point four billionth of a share percent ownership is now increased by one point f sorry one to four point five billionth of a share price that's hard to say the point is by holding the share over the eight year period of time your ownership stake has grown now you have a greater piece a bit greater claim on the cash flow having done nothing even though you didn't even get any cash out of that cash flow per share shares that share price average gives me a yield when i look at the yield third 32 obviously way too high that's too high because they borrowed a lot of money to get the sky acquisition done so that's an anomaly the 4.7 yield here is a nice yield that's after that making that debt payment so i think their current yield is probably someplace around eight percent um you know assad debt payment assigned post debt payment it's about five percent okay before we forecast forward i want to make something clear there's a uh activist shareholder uh pulse who is nielsen pulse who have joined who's bought into the business if you put 900 million dollars which is a small percentage uh ownership of the business but it's there and he's trying to pressure the current ceo mr roberts to sell off divisions of comcast because he believes the activist believes that the the the sum of the parts is greater than the whole uh and then by selling off different divisions he can realize more value than is currently being represented here in these in these numbers here all right um and i think that pressure is a good thing that means that the activist is confirming with my analysis that he believes there is deep value here i'm not sure i think that the owner roberts who who has 33 voting share of the company is going to allow that to happen i have a feeling uh the business is going to continue churning like it is but i wanted to make a note that there is an activist trying to shake things up that activist has been successful in the past a couple other businesses so it could be a good thing but i just want to make that comment okay now we've covered revenue ebitda cash flow debt and the enterprise value let's go through and forecast and come up with what we think the long-term share price of comcast should be we'll then compare to the financials financial markets and see what we can buy it for today ebitda 2020. now we went through and we looked at the q3 2020 quarterly report and it said that uh year-to-date ebitda was down 8.5 so what i've done is i've haircut ebitda 10 for a 2020 estimate of 30.1 billion dollars is i then said that okay post covid poster vaccine we're going to have some rebounds i'm giving them 10 it doesn't get us fully back to where we were but it helps offset some of the huge decline that we're current that they're currently experiencing i'm then going to level eyes at six percent why six because historically they've been doing slightly north of that recently but long term i think the six is very doable for these guys and i don't want to give too much credit to the forecast because some of it was acquisition driven but i want to say that they can figure out how to grow their the businesses and six percent seems a very reasonable target to me especially as they grow they will have more room to borrow and more room for acquisitions so what this does it takes ebitda from 30 billion to 53 billion dollars by 2029 after that i am then assigning a 13 multiple to 53 billion dollars it gives me 700 billion dollar market cap why the 13 well i think this here dramatically underestimates the value of this business it does not deserve a single digit ebitda multiple and has been largely undervalued for many many years and given where disney and netflix are with their subscription services i think there's significant upside if peacock does take hold and they continue to grow that business uh they're a significant upside for the market multiple uh perspective as if the business catches a bid so i'm saying long term it will grow to 13 times ebitda and puts it a 700 billion dollar evaluation uh less debt which i've kept it three times ebitda based on our earlier disc analysis gives you a market cap of 537 billion dollars divide by the existing shares outstanding it gives me 118 dollar price target out in 10 years okay we just forecasted ebitda let's forecast free cash flow so in 2020 i've got a zero estimate for free cash flow that's because with everything going on covet and some of the some of the declining ebitda and debt payment they have to make i'm going to say it's zero probably north of that but for for to be conservative i'll give it zero 2021 2012 cents i'm copying the 2019 number this is 2019 results after debt payment in their ebitda forecast i have this kind of springing back so i'm using 2019 as a proxy because they make a 5 billion debt payment that means they have 2 dollars and twelve cents of free cash flow left over they then grow that at six percent based on the ebitda number that they've had and i get 225. there's a big step up here year three what happens this is the five billion dollars that they were paying down in debt they no longer have to make it paid down because they're now three times debt to ebitda especially with the ebitda growth that we're forecasting so that five billion dollars then becomes free and distributable and it's a fifty percent bump in free cash flow i then grow that larger number six percent with the rest of ebitda and i get a long-term price target of 123 dollars per share uh that's a four percent free cash flow yield by the way okay now we have two price estimates for comcast let's take a look at uh what that means so we've got one estimate 123 dollars another 118 dollars two different methods i'm going to average the two for 120 a share it's currently trading at 42 a share if we put this into an irr calculation so we get principal investment i'm in for 42 bucks i get a stream of cash flow that they may or may not distribute or pay off shares with but it's but it's mine as a as an owner of the business and i sell my shares at 120 a share uh 10 years from now this is the stream of cash flow that is an 18 annualized irr over that decade per time which is above market for sure uh and a very strong investment return for kind of a simple business that is roughly 3.6 times cash on cash return on your investment and this dovetails well with what they've done in the last 10 years right the last decade as we've read from the shareholder letter that they grew over 500 percent over the last decade this has them growing 360 percent over that next decade so a little more conservatism but it's definitely strong growth and definitely something you should consider adding your portfolio if you're looking for a media company something that's not quite as rich as a netflix or a um or a walt disney as i always do i give you a distribution curve as time moves on you can come back to this video and you can say okay i still believe in the long-term forecast but the price has changed what's the economic return if i buy it today so 42 bucks is 18 irr as the share price goes north that irr obviously comes down to 13 if you're buying it in the mid 50s if for some reason it should fall and you're in the mid 30s it's 20 percent irr still a phenomenal buy in my opinion so in this channel we're going to give this stock a good rating why let's recap top line revenue growth yeah solid single-digit number ebitda growth yes solid single-digit number strong free cash flow yes it is low debt yes it is i'm giving the check box because they're buying it down it's right on the cost of the three times and well priced absolutely i think the stock is cheap it has been cheap for a long time is not getting the recognition that it's due and if it is to rise on naturally on earnings or let me say that a different one not moving the market multiple too much of going to 13 times you get an outperform 18 ira over a decade if for some reason this this this should really catch a bit and move up to what walt disney's training at 30 34 times the prices is is much much higher and i can show you that right now um so if we take the ebitda forecast that we have right we've got a price target of 53 billion dollars in 10 years but i'll show you this different that's making a 118 valuation if i were to move this to 30 34 that's that's i'll just give it a 25 times which is still very high not as high as disney or netflix but still definitely moving that bar way north that produces a 260 dollar price target which is uh almost more it's more than double what i currently have being conservative at a 13 times ebitda market multiple so i think what you're looking at here is a good stock that has a decent amount of debt but it's manageable it makes cash it it's growing it can it should produce a long-term market beating return and if it has upside and actually gets a bid you could you could see a market multiple extent expansion which would which would be even larger in this channel we look for what something i call the trifecta uh it's a little it's a phrase that i'm using so the trifecta would be earnings growth like ebitda natural earning growth which these guys have buying back shares so share count reduction which is your your shares growing over time which is what they with these has and a well-priced stock meaning the stock market market multiple is cheap and i'm expanding the market multiple over time i think those three metrics actually lead to outsize returns and it's what happened when we looked at the domino's video you could buy it at single digit when it ipo'd they bought back shares over time they grew earnings and the market multiple expanded those three things combined to magnify the return over long term i think this could be an example of one if they can really capture that online subscription piece over time so definitely take a look at it i'm very eager to hear the comments on this one let me know what you think my name is cameron stewart cfa this is rational investing where we're buying cash flow assets that's what we look for thank you very much please subscribe let me know what you think and i'm happy to take recommendations thank you very much bye

Channel: Cameron Stewart, CFA

Views: 7,241

Rating: 4.9897957 out of 5

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Id: g7WYJbnvRVk

Length: 30min 30sec (1830 seconds)

Published: Wed Dec 30 2020