Before I tell you the name of the company I’m writing about, we need to establish one ground rule. Investing means sometimes looking for value in companies that have made you mad in the past. If you can accept that one rule, let me suggest that Comcast Corporation (NASDAQ:CMCSA) might be one of the best investments that many people will refuse to make.
I’ve Been There
Trust me, I know what some of you are thinking. Some people just read Comcast’s name and immediately had a negative reaction. I won’t lie, Comcast has driven me crazy in the past. The company’s service leaves something to be desired, and some decision making seems to ignore logic.
As an example, why is it that Comcast Corporation (NASDAQ:CMCSA) can charge more for high-speed Internet if you don’t also have a video package? It’s not as though the Internet service is more challenging to deliver, it’s the same cables, the same everything, but without video into a television. The answer is, Comcast can charge more just because they can.
Why is it that you have to pay the same price to watch your favorite five channels, when other people pay just as much to watch 30? Shouldn’t you be able to pick what you want, and only pay for that? Unless you are willing to cut the cord completely, or go with DIRECTV (NASDAQ:DTV), DISH Network Corp (NASDAQ:DISH), or Verizon Communications Inc. (NYSE:VZ)‘s FiOS, you are sort of stuck. However, this is also a huge misconception about Comcast Corporation (NASDAQ:CMCSA); this company is now so much more than your cable and Internet provider.
One Part Growth, One Part Income
What changed about Comcast over the last few years is, they bought part of NBCUniversal, only to acquire the entire entity from General Electric Company (NYSE:GE). This acquisition changes who Comcast is, and the investment theory behind the company.
Prior to this acquisition, Comcast Corporation (NASDAQ:CMCSA) was just the “hated” cable company, competing with other services. Today, Comcast is only about 50% the cable business, and the other 50% is NBCUniversal. Ironically, the cable business is doing very well. While people might complain about the service, customers aren’t running out the door like we’ve been led to believe.
In fact, in the current quarter, the company’s video revenue actually increased 3.7%, though the customer count dropped by 0.27%. Future growth in the cable business will come instead from high-speed Internet, which saw its customer count increase by 2.33%, and revenues were up 8.6%. Comcast Corporation (NASDAQ:CMCSA) is also stealing voice customers from Verizon Communications Inc. (NYSE:VZ) and others, with customers up 2.22%, and revenue up 2.6%. The cable business comes with very high margins, and tremendous cash flow, this is the income part of the equation.
The growth part of Comcast comes from the NBCUniversal business. This business puts Comcast Corporation (NASDAQ:CMCSA) in competition with companies like CBS Corporation (NYSE:CBS), The Walt Disney Company (NYSE:DIS) and their ABC and ESPN channels, and Time Warner Inc (NYSE:TWX)‘s TBS and TNT businesses.
While it’s true that NBC didn’t perform well in the current quarter (revenue down over 18%), this had more to do with the loss of the Super Bowl to CBS than anything the company did wrong. By comparison, CBS Corporation (NYSE:CBS) reported an 8% increase in revenue at its network channels, Time Warner Inc (NYSE:TWX) and The Walt Disney Company (NYSE:DIS) reported low single-digit growth.
That being said, the Universal part of NBCUniversal should be a growth driver in future quarters. While Disney cashed in on popular releases like Wreck-It Ralph and saw filmed entertainment revenue jump 13%, Comcast’s Universal Pictures reported a 2% increase. In the same quarter, Time Warner’s Warner Bros. reported filmed entertainment revenue decreased by 3.7%. As you can see, Universal didn’t do as well as Disney, but it didn’t do badly either. However, with hit movies out like Fast & Furious 6, and strong upcoming releases like Despicable Me 2, 2 Guns, and Riddick, the rest of the year looks strong.
Growth And Income Here, Too!
Just like Comcast Corporation (NASDAQ:CMCSA)’s cable business provides income, and NBCUniversal should provide growth, Comcast’s stock is a great growth and income play. In fact, depending on the day, Comcast or Time Warner might have the better yield of their peer group at about 1.9%.
However, where Comcast is the unquestioned leader is the company’s expected earnings growth rate. Analysts expect Comcast to grow earnings by 17.5% over the next few years. Compared to CBS at 13.62%, Disney at 12.5%, and Time Warner at 12.43%, Comcast is light years ahead. In addition, Comcast’s unique blend of divisions leads to the best margins of the group as well.
In the current quarter, Comcast Corporation (NASDAQ:CMCSA)’s operating margin was 29.85%. Considering that Disney and Time Warner both have margins of about 23%, and CBS’ operating margin was just 20%, you can see that Comcast is leading the way by this measure as well.
In the end, investors get a company with huge cash flow, a decent dividend, and class-leading growth. Comcast is retiring shares (2.51% in the last year), and pays just over 19% of its core free cash flow in dividends. With a total expected return of more than 19%, paying about 17 times forward earnings sounds like a very good deal. When you consider that Comcast’s peers are all growing slower, offer lesser dividends, and carry forward P/E ratios of at least 16, this looks like the best investment of the bunch.
Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 1 Huge Value Where Investors Don’t Want to Look originally appeared on Fool.com and is written by Chad Henage.
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