At Comcast, “2018 suddenly feels an awful lot like 2004,” writes veteran telecom analyst Craig Moffett in a report to clients today.
He’s talking about investor’s bad reaction to the company’s proposal buy Sky TV in Europe for $31 billion cash, and its “likely follow-on pursuit of Fox.” Comcast shares have slid below $33 as of Thursday, from above $42 in January. Moffett has cut his own target for the stock to $41, from a previous $52.
Moffett blames, not U.S. stocks’ recent trade-scare tumble, but Comcast’s recurring “conglomerate discount,” a price of the latest and boldest of CEO Brian Roberts’ recurrent attempts at empire-building, fueled by the cash and credit generated by its high profit margins on your cable and Internet bills.
Back in 2004, it was Roberts’ abortive attempt to buy Disney for $54 billion that dismayed investors, who would rather Comcast spend its piled-up profits in short-term buybacks of its own shares, which tend to push the stock higher. Investor “frustration,” in Moffett’s telling, killed that ambitious Disney deal by devaluing the Comcast stock Roberts hoped to pay for it with.
Maybe “just as in 2004, Comcast may well be forced by the (stock) market to abandon its pursuit of Fox,” which would presumably be financed by Comcast’s now-depreciated stock, and “let Sky go as well,” if that’s just a way to get Fox; killing the deals would likely drive Comcast stock back up, Moffett added, noting Comcast rose 5 percent immediately after it killed the Disney offer.
He understands “investor frustration” that Comcast would pay more than 12 times earnings for Sky — if you see Sky as only “a secularly-challenged one-way-only satellite business plus broadband-reseller.” It would be much more profitable to have instead bought back Comcast shares when they were trading at a little more than 8 times earnings last winter. (Since the Sky fall Comcast is now down to a little more than 7 times earnings — an even better bargain.)
But Moffett says he’s more sympathetic to what Comcast is trying to do: He notes that the Sky isn’t just a TV distributor but also an all-Europe “content brand,” with a lot of proprietary shows that could become an ad and subscriber platform worldwide. Because, as Netflix and Amazon are showing with their multibillion-dollar investments in video creation, “Comcast’s ambition must be seen in the context of a global shift toward captive studio production (and) distribution” on an “extraordinary global scale” to fight other emerging content giants.
For Comcast to reach that world domination goal, Sky alone won’t be enough, Moffett adds. Fox is “a great studio and some great content,” though it also faces slowing growth in its current markets, and advertisers deserting video. Moffett also cites Comcast’s second high-rise tower in Philadelphia as a drag on profit growth.
Investors worry Comcast’s NBC Universal is “vastly riskier” than it used to look, requiring big investments for “uncertain” profits, Moffett adds. If Comcast were to double down with Sky and Fox, it raises the natural question: Will Comcast keep diverting steady cable cash “to Comcast’s media ambitions?”
Yet Comcast has thrived by picking new products (Internet, movies, theme parks) as old ones age (cable). If the enterprise — and Roberts family control — is to survive, won’t they have to dream big and pay out billions somewhere?
Moffett notes that a simple stock price analysis suggests that, if you look at Disney’s later share price, “it would have been a great thing for Comcast shareholders” if Roberts had been able to ignore them and buy Disney 14 years ago. Of course he adds the substantial caveat that a Comcast-Disney combination would have brought tight regulatory and market-share scrutiny that might have derailed Comcast’s expansion strategies in the years since. But, ignoring the government’s uncertain response, “Comcast might easily draw the conclusion that the longer-term gains justify the near-term pain,” and they might stick with bold Sky and Fox type deals, over Wall Street complaints.
Video remains highly profitable. Internet services is still growing. At recent levels, Moffett concludes Comcast shares are “cheap.”