Comcast (NASDAQ: CMCSA) shares have been on a bit of a wild ride so far this year.
The media giant started the year strong, rising 5% by January 17. But since then, shares have fallen more than 6% and are down nearly 2% year-to-date.
But despite this recent tumble, MoffettNathanson analyst Craig Moffett said in a note this week that now is the time to buy.
On Tuesday, Moffett boosted his rating on Comcast shares from Neutral to Buy and upped his price target from $49 to $52 – 16.6% higher than the stock’s price as of this writing.
According to Moffett, Comcast is “too cheap on any reasonable sum-of-the-parts valuation.”
“Enough is enough,” the analyst wrote. “Comcast has underperformed pure-play Charter Communications (NASDAQ: CHTR) by an astounding 34% over the past year. To a degree, this makes sense. Comp valuations for media have plummeted, and NBCU faces a difficult slog in the pivot to Peacock. But at Comcast’s current valuation, either NBCU, or Sky, is arguably being priced at less than zero. Even with a conglomerate discount, Comcast is too cheap… Free cash flow yields, and Comcast’s astonishingly low P/E multiple, render the same conclusion… Comcast is too cheap.”
Moffett admitted that he has long been a skeptic of Comcast. He didn’t think buying NBCUniversal made much sense, nor did he think buying the Sky satellite TV service was the smartest decision.
“We’ve always lauded the NBCU deal as a brilliant financial transaction but we’ve never quite seen the logic in its pairing with cable,” he wrote. “Nor have we ever seen the logic in having added Sky to the mix (at any valuation, let alone the nosebleed multiple Comcast paid for the privilege). We’ve assigned a hefty conglomerate discount to our sum of the parts valuation to reflect Comcast’s challenging portfolio dynamics and suboptimal capital allocation.”
But while Moffett says Comcast is a bit of a structural mess, in his view, it’s a cheap mess and there’s little downside risk in the shares.
“Comcast’s portfolio construction remains problematic,” he wrote. “There is no compelling logic for why Cable, NBCU, and Sky should coexist under a single umbrella. And Comcast’s non-cable assets themselves are problematic. The secular challenges facing NBCU’s cable and broadcast networks are real, as are the challenges facing Sky… But while all of those considerations justify a discount, the don’t justify a discount this large.”
By Moffett’s math, Comcast’s core business alone supports the current valuation, which means investors are getting NBCU and Sky for nothing.
Moffett assumes a 12 times EBITDA—earnings before interest, taxes, depreciation, and amortization—multiple for Comcast’s cable business by the end of this year, which is roughly in-line with Charter’s. Given that, “NBCU and Sky would be trading for nothing.”
“The suggestion that NBCU and Sky are worth more than zero seems unlikely to draw much argument,” Moffett wrote.
In Moffett’s view, there is “no compelling logic” to keeping Comcast’s cable business and media business together.
One reason the stock is so cheap, Moffett argues, is that pure-play cable companies return the cash they generate back to shareholders, while Comcast reinvests its cash into its media business.
If Comcast were to break the company into two parts, its cable business on the one hand and the media side with NBCU and Sky on the other, “a tremendous amount of value could be unlocked.”
Moffett isn’t the only analyst to argue there’s little downside risk for Comcast shares.
Late last month, UBS analyst John Hodulik said that 2020 will be “an investment year” for Comcast with “working capital drags” including investments in the NBCU Peacock streaming service and its Sky business in Europe putting pressure on free cash flow and reducing stock repurchases.
“While the cable business remains strong (especially broadband), we expect EBITDA growth to decelerate for the next 2 years given programming renewals,” Hodulik wrote. However, compared to its pure-play cable peers, Comcast’s risk-reward looks “more balanced” even despite the anticipated decline in free cash flow.