Stock Pick: Comcast (CMCSA) deals imply higher value down the line

A busy four weeks of deals

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Chart showing trailing 12-month performance of Comcast's stock

It’s been a busy four weeks for U.S. cable giant Comcast (NASDAQ: CMCSA). On January 27, the company announced its fourth quarter results, where revenues and earnings beat estimates. On February 13, it announced that it was buying Time Warner Cable for $45 billion and on February 24 it was revealed that Netflix was paying Comcast an undisclosed amount for seamless, high quality streaming.

What does all this news mean for investors? Up until now, not much. The stock is down 0.7% year-to-date, but some analysts think the stock will climb soon enough.

Netflix and Comcast

It’s not clear how this partnership will play out just yet, but if Netflix decides it only wants to make this deal with Comcast, then that’s certainly a benefit for the cable company.

In a February 23 blog post, Richard Greenfield, an analyst with BTIG, says Comcast could steal market share from Verizon, but only if Netflix doesn’t strike a deal with its competitor. He also points out that Comcast sees a future where everything is streamed over the Internet and this arrangement plays into that thinking.

“Comcast sees a media and technology world where everything flows over IP pipes,” he writes. “Comcast wants to own its subscribers’ media lives.” This deal could make its X1 set-top box—similar to Apple TV—more enticing, especially if it starts offering Netflix through the service. “They want X1 to be the central media hub in the home,” he writes.

Time Warner purchase

Of course, the Time Warner purchase is the most significant development so far this year and Todd Mitchell, a Brean Capital analyst, thinks it’s a good one.

Comcast has said that it will be able to achieve $1.5 billion in cost synergies over the next three years, with 50% of that being realized in the first year.

Mitchell thinks those synergies will be recognized faster—Comcast have a history of underestimating the affect of acquisitions, he says—and he thinks the deal will give them a deeper foothold in the residential market than it thinks. He also points out that the purchase leaves the rest of the market in disarray.

“We think the deal offers a clear path to value creation for Comcast and Time Warner Cable shareholders, but strips much of the value out of the rest of the industry,” he wrote in a February 20 report. “Comcast got all the good assets. What is left?”

The company is currently trading at $51, but Mitchell thinks it could hit $63 over the next 12 months. Other analysts think it could get even higher. The median target price is $66, with the most optimistic estimate hitting $75 and the lowest $49, according to S&P Capital IQ.

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