Comcast (CMCSA) – A Value Trap

A value trap investment is a bit of a tricky subject. At first glance, a company looks cheap. At second glance, it looks too good to be true. You think to yourself, “why am I able to buy conglomerate X below book value? Why can I buy X at a single digit price to earnings ratio?” The answer is, oftentimes, the company is a value trap. A value trap looks cheap, but in the long run, the business is deteriorating.

At first glance, Comcast (CMCSA) screams two things: massive and cheap. Its business, pushing a market cap over $148 billion, is split into five segments: cable communications (think Xfinity), cable networks (regional sports networks and news), broadcast television (NBC and Telemundo), filmed entertainment (Universal Pictures, Dreamworks Animation, etc.), and theme parks (3 Universal theme parks). For grins, CMCSA also owns the NHL’s Philadelphia Flyers and their venue, the Wells Fargo Center.

Comcast’s large distribution areas are: Seattle, Portland, San Francisco, Sacramento, Freson, Denver, Salt Lake City, Houston, most of Florida, Atlanta, Nashville, D.C., Baltimore, Philadelphia, Pittsburgh, Chicago, Grand Rapids, Detroit, Indianapolis, Minneapolis, Hartford, and Boston. Their service spans over 28 million households. It’s massive.

National TV Networks

Network Approximate U.S. Household Subscriber (millions)
USA Network 91
E! 89
Syfy 89
MSNBC 89
CNBC 87
Bravo 87
NBC Sports Network 84
Oxygen 74
Golf Channel 73
Universal Kids 58
CNBC World 34
The Olympic Channel 25

 

Comcast Looks Cheap

CMCSA’s current price to earnings is 6.60. Comcast isn’t alone in having a slightly misleading P/E; many US companies have an absurdly deflated P/E due to the 2017 tax reform. It’s earnings in the past five quarters looked like this:

Quarter Earnings Per Share
March 2017 $0.53
June 2017 $0.52
September 2017 $0.55
December 2017 $3.14
March 2017 $0.66

 

In their 10K, Comcast stated the 2017 tax reform gave them a $12.7 billion net income benefit. This works out to $2.65 a share in tax benefit. Making their earnings for December 2017 $0.49 a share without the tax benefit. Now, one can debate that this adjustment is totally legitimate, CMCSA had a giant windfall of money from tax reform. True. But one cannot debate this greatly changed their P/E ratio. Removing their tax benefit, CMCSA is trading more around 14.5 times earnings. Still think it’s cheap?

Remember those massive numbers for US household subscribers for CMCSA’s portfolio of channels?

Channel Subscribers 2014 Subscribers 2017 Change (millions)
USA Network 96 91 -5 million
Syfy 95 89 -6 million
MSNBC 95 89 -6 million
E! 94 89 -5 million
CNBC 94 87 -7 million
Bravo 92 87 -5 million
NCB Sports Network 81 84 +3 million
Golf Channel 79 73 -6 million
Oxygen 78 74 -4 million
Esquire Network 70 N/A
Sprout 58 N/A
Chiller 39 N/A
CNBC World 38 34 -4 million
Universal HD 31 N/A
Cloo 26 N/A

 

Comcast said it themselves in their 10K risk factors: “Consumers are increasingly turning to online sources for viewing and purchasing content, which has and likely will continue to reduce the number and video customers and subscribers to our cable networks even as it makes our high-speed Internet services more important to consumers.”

 

Comcast is Out of Touch

I recently visited a Comcast store twice in the same metro area. This was fueled by need for a new cable box, but I also couldn’t help but do some Peter Lynch style research. What did I find? The first time, the store was EMPTY. How empty? The only people in the store besides me and my wife were Comcast employees. The second time, I decided to visit in the evening after work hours. What did I find? Six customers. All six were at least 50 years old and getting assistance with cable boxes. 50 year olds are certainly not trend setting mavericks who indicate success of future businesses.

Comcast is a business that is LOSING customers (186,000 in 2017; 96,000 in Q1 2018) but making MORE money (revenue, gross profit, and net income are all growing in a perfectly linear fashion). The squeeze on advertisers and customers cannot last forever, and neither can creative accounting. At the same time, streaming alternatives like Roku and the emerging AT&T streaming service are available for around $15/month. Comcast’s streaming service that requires connection to their broadband internet looks like the dinosaur in the room with the hip new kids.

Verdict: Although Comcast looks cheap based on metrics and its size, I believe it is a value trap.

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