The Huge And Growing Media Stock With 80% Upside Potential

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Wall Street analysts take a lot of heat, which may be a bit unfair considering they have one of the toughest jobs imaginable -- predicting the future. And though analysts often misread the future tea leaves, they also get it right plenty of the time.

One stock that is favored by analysts indeed appears to have an alright (if controversial) future. I'm talking about Comcast Corp. (Nasdaq: CMCSA ) , which is rated as "Buy" or "Strong Buy" by 24 out of the 27 analysts that cover the company.

Comcast is the nation's largest cable TV provider, and it will grow yet larger if its merger with Time Warner Cable, Inc. (NYSE: TWC ) is approved. Prior to that deal's consummation, Comcast has already been a solid growth story. Profits grew at a 20% clip over the past five years, and analysts expect double-digit growth this year as well.

Comcast is boosting profits the old-fashion way: Through superior operating metrics.

The firm is well ahead of the industry averages in almost every key measure of growth and profitability, as the table below shows.

Comcast Growth and Profitability Metrics

Revenue Growth (3-yr. avg.) Net Income Growth (3-yr. avg.) Operating Margin (past 12 months) Net Margin (past 12 months) Return on Assets (past 12 months) Return on Equity (past 12 months) Debt-to-Equity Ratio
CMCSA 19.5% 23.3% 21.7% 12.3% 5.3% 16.3% 0.8
Industry Avg. 11.6% 11.9% 17.7% 7.9% 4.0% 21.7% 2.6


Comcast's lone weak spot is return on equity -- net income as a percentage of shareholder equity, which is explained by the fact that Comcast carries relatively low levels of debt. (Debt falsely elevates ROE and, as you can see, the typical competitor carries more than three times as much debt as Comcast.)

A quick peek at recent quarterly results suggests that Comcast is not feeling the pain of the much-discussed "cutting the cord" movement. Sales rose 4% in the third quarter to $16.8 billion and 6.9% to $51 billion in the first three quarters combined.

Several standout businesses underlie this strong overall growth, like the Cable Communications segment's high-speed internet services. Through the first three quarters, the segment netted 901,000 new high-speed internet customers, a 6.4% year-over-year gain that raised the total number of these customers to 22.6 million. High-speed internet sales were up 9.4% during that time to $8.4 billion.

The Broadcast Television segment, which includes NBC, the Spanish-language network Telemundo and a number of cable networks, has been extremely successful. Through the first three quarters, segment revenues soared 27% to $6.2 billion, thanks to major gains in advertising and content licensing resulting from factors like higher audience ratings and new licensing agreements.

The Theme Parks segment, which consists mainly of the Universal theme parks in Orlando and Hollywood, posted $1.9 billion in revenues during the first three quarters, a 13% year-over-year increase. This outperformance was due mainly to new attractions capitalizing on the continued popularity of the Harry Potter fantasy novels and movies.

To be sure, the proposed buyout of Time Warner Cable is a wildcard. Critics of the deal want the Federal Communications Commission (FCC) to block the deal because it would create an industry behemoth with unfair competitive advantages and price-setting ability, as well as too much power to decide what types of content consumers can access.

Comcast would certainly be a colossus post-buyout, controlling nearly 66% of the cable television market and about 40% of the high-speed internet market. Its high-speed internet subscriber base would balloon by nearly half to about 32 million.

There's also burgeoning issue of so-called net neutrality, which has numerous supporters including the Obama administration. The FCC may rule that broadband and internet service providers like Comcast could not charge content providers to ensure faster, more reliable internet connectivity.

Internet service providers obviously oppose net neutrality because it would negatively impact profits and help commoditize internet access, eventually making it more like a regulated utility and ultimately much less profitable. It's a prospect that could lead to Comcast backing out of the Time Warner deal.

I doubt that will happen, though, because the FCC is looking for alternatives to net neutrality that allow an internet fast lane. It's certainly not a done deal, but the fact that the FCC is floating compromises this early in the game makes me reasonably certain net neutrality won't end up being a major drag on profits for industry majors like Comcast.

So CEO Brian Roberts is probably correct in predicting the Time Warner buyout will occur in early 2015. To demonstrate his commitment to the deal, he offered the FCC sweeteners such as a divestment of several million customers to help avoid antitrust issues.

Risks To Consider: Although unlikely, the FCC could end up wrecking the Time Warner acquisition. This would materially reduce Comcast's prospects for future profit growth. The net neutrality issue also remains something of a wildcard and resulting regulations could be harsher than expected.

Action To Take --> Look for current uncertainties to shake out in favor of Comcast, though even without Time Warner the company is capable of 13%-a-year earnings growth because of its dominance. This implies at least 80% upside for the stock to about $99 during the next five years, assuming an earnings multiple in the historic range of 17.

Because of its financial strength, the company should also be able to keep up its dividend raises, which have averaged roughly $0.11 a year since 2008. At that rate, the payout would grow to $1.44 a share in five years, compared with $0.78 currently. I'm with the analysts on Comcast also rate the stock a "buy."

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.