Is an Outperform in Comcast’s Future?

With shares of Comcast (NASDAQ:CMCSA) trading around $50, is CMCSA an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Comcast is a provider of entertainment, information, and communications products and services. The company operates in five segments: cable communications, cable networks, broadcast television, filmed entertainment, and theme parks. Comcast offers television, video, high-speed Internet, and voice services to residential and business customers. It also operates NBC and Telemundo broadcast networks; provides filmed entertainment under the Universal Pictures, Focus Features, and Illumination names; and operates theme parks, studios, and a dining, retail, and entertainment complex.

Sometimes, it can be hard to convince investors that mega-mergers will actually create value. This is because sometimes (often, really) mega-mergers don’t actually create value — they just cause a lot of headaches, make a select few people rich, and open the door to all sorts of unattractive corporate politics. Cue Comcast and the $45.2 billion deal it wants to make for Time Warner Cable (NYSE:TWC). Comcast will purchase 100 percent of Time Warner in a stock-for-stock transaction, acquiring each of Time Warner’s 284.9 million outstanding shares for 2.875 shares of Comcast Class A common stock. Comcast’s normal Class A common stock, which trades under the CMCSA ticker, has fractional voting rights, whereas the special Class A common stock, CMCSK, has no voting rights. Comcast also has a non-publicly traded Class B stock, which has 15 votes per share and is controlled entirely by President and CEO Brian Roberts.

If the deal goes off without a hitch, Time Warner Cable shareholders will be left owning 23 percent of Comcast’s common stock. Roberts sweetened the deal by announcing a $10 billion share repurchase program to be conducted at the close of the transaction. Moreover, Roberts believes “there are meaningful operational efficiencies and the adjusted purchase multiple is approximately 6.7x Operating Cash Flow.” Comcast and Time Warner executives believe the deal will be accretive to cash flow and that they can squeeze about $1.5 billion in efficiencies from the combined entity — that is, executives believe that can pull off that rarest and neatest of tricks: creating value.

T = Technicals on the Stock Chart Are Mixed

Comcast stock has been pulling back in recent times. However, the stock is currently moving higher and looks set to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Comcast is trading between its rising key averages which signal neutral price action in the near-term.

CMCSA

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Comcast options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Comcast options

22.77%

33%

30%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Comcast’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Comcast look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

27.92%

-16.67%

30.00%

20.00%

Revenue Growth (Y-O-Y)

6.21%

-2.38%

6.96%

2.90%

Earnings Reaction

1.63%

-1.29%

5.54%

1.35%

Comcast has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Comcast’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Comcast stock done relative to its peers, Time Warner Cable (NYSE:TWC), DirecTV (NASDAQ:DTV), Dish Network (NASDAQ:DISH), and sector?

Comcast

Time Warner Cable

DirecTV

Dish Network

Sector

Year-to-Date Return

-2.38%

3.65%

12.54%

7.84%

4.03%

Comcast has been a poor relative performer, year-to-date.

Conclusion

Comcast provides communications and entertainment products and services to consumers and companies. The company will purchase 100 percent of Time Warner in a stock-for-stock transaction, acquiring each of Time Warner’s 284.9 million outstanding shares for 2.875 shares of Comcast Class A common stock. The stock has been pulling back in recent times, but is currently moving higher. Over the last four quarters, earnings and revenues have been on the rise, which has left investors pleased about recent earnings announcements. Relative to its peers and sector, Comcast has been a weak year-to-date performer. WAIT AND SEE what Comcast does this quarter.

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