How much downside does CMCSA have, and should you consider buying it?

Moving into the end of the week, most of the commentary now has started to shift away from whether or not the coronavirus outbreak, which have dominated all of the media’s attention this week, will have a global economic impact to just how severe it is going to be, and how long it is going to last. Safe havens probably seem pretty hard to find under current conditions, as the market sold off sharply at the end of the day on Thursday to finish what I’ve seen some analysts call the worst one-day drop ever. Early indications this morning seem to indicate that the market is set to sell off even more into the weekend, capping one of the worst weeks in the last ten years.

As of this morning, all of the major indices have dropped into correction territory, having pulled back more than -10% from the last set of all-time highs last week. Early reports this morning from the airline industry continue to stoke the flames of uncertainty; American Airlines announced they are extending the suspension of flights into China out to the end of March, and reducing flights to most of the rest of the Asia-Pacific area. That’s a pretty dramatic reflection of general sentiment, and I think helps to make sense not only of pressure in the stock market, but also part of the reason crude prices across the board are at their lowest levels in a year.

While it isn’t one of the worst decliners in the market right now, the Consumer Discretionary market is certainly one of the sectors that I think is pretty exposed to the risk that could come from increasing consumer perception about the impact of the virus on a localized basis. To this point, the U.S. has certainly not felt the same impact as China, Japan, and other parts of Asia that have seen a rapid increase in infected cases and have forced business and school closures and more. If, as the CDC warned earlier this week, the virus does begin to spread in the U.S. and North America on an increasing basis, then I think this is a sector that could be more sharply affected, as consumers start to change their regular routines and think in more fearful terms about their own homes. That means that even the biggest stocks in the industry, including Comcast Corp (CMCSA) could still be sitting on the sharp edge of risk for the time being. From a fundamental standpoint, CMCSA is, not surprisingly one of the strongest companies in the industry, but has lost about -11% of its value over the last week, and nearly -14% since mid-January as uncertainty has increased. Some analysts, like Jim Cramer are starting to talk to about using current market conditions as an opportunity to buy strong “stay at home” stocks right now. Does CMCSA fit the bill?

Fundamental and Value Profile

Comcast Corporation is a media and technology company. The Company has two primary businesses: Comcast Cable and NBCUniversal. Its Comcast Cable business operates in the Cable Communications segment. Its NBCUniversal business operates in four business segments: Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks. Its Cable Communications segment consists of the operations of Comcast Cable, which provides video, high-speed Internet and voice services to residential customers under the XFINITY brand. Its Cable Networks segment consists of a portfolio of national cable networks. Its Broadcast Television segment operates the NBC and Telemundo broadcast networks. Its Filmed Entertainment segment primarily produces, acquires, markets and distributes filmed entertainment across the world, and it also develops, produces and licenses live stage plays. Its Theme Parks segment consists primarily of its Universal theme parks in Orlando, Florida and Hollywood, California. CMCSA has a current market cap of about $186.9 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 23.5%, while revenues increased 1.98%. in the last quarter, were flat, at 0.0% while sales rose almost 6%. The company’s margin profile is healthy and stable. In the last quarter, Net Income as a percentage of Revenues was 11.13% versus 11.15% over the last twelve months.

Free Cash Flow: HFC’s free cash flow is healthy, at $14.5 billion, and marks a modest improvement from around $13.9 billion at the beginning of 2019. That translates to a Free Cash Flow Yield of 7.58%.

Debt to Equity: HFC’s debt to equity is 1.23, which is high, but not unusual for stocks in the same industry. The company’s balance sheet indicates operating profits, should be adequate to service their debt, although long-term debt is very high. In the last quarter, CMCSA showed about $5.5 billion in cash and liquid assets in the last quarter versus almost $103 billion of long-term debt.

Dividend: HFC’s annual divided is $.92 per share, which translates to a yield of about 2.24% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at about $47 per share. That means the stock is trading at a decent, but not quite yet compelling discount, with about 18% upside from the stock’s current price.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above covers the last two years of price activity. The red line traces the stock’s upward trend from May 2018 to its peak in early January at about $48. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s near-term momentum matches broad market conditions and is clearly bearish and accelerating. The stock is right around current support at the 38.2% Fibonacci retracement line around $41, with closest resistance at around $42.50 per share. If the stock breaks below $41, its next closest support is probably around the 61.8% retracement line at around $37 per share. A break above resistance at about $42.50 could see new bullish momentum to about $45 per share.

Near-term Keys: Given the strength of the stock’s current bearish momentum, the best probabilities for short-term trades lie on the bearish side. If the stock’s current slide continues with a push below $41, consider shorting the stock or working with put options, with an eye on the quick exit target at around $37 per share. I think the odds of a good bullish bounce right now are pretty low, but if you don’t mind being speculative and the stock does push above $42.50, you could consider buying the stock or working with call options; in that case, don’t be shy about taking profits quickly if the stock approaches $45. While the stock isn’t a compelling value right now, a drop to around $37 could offer an interesting opportunity in the long-term in one of the largest companies in the Media industry.


X