Will Comcast Stock Return To Its Pre-Inflation Shock Highs?

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Comcast stock (NASDAQ: CMCSA) currently trades at $45 per share, about 27% below the peak of $61.75 seen in September 2022, and appears to have some room for gains. Comcast, which is one of the country’s largest cable TV and internet players, saw its stock trading at around $39 in early June 2022, just before the Fed started increasing rates. Comcast stock has been weighed down by a couple of factors, including slowing growth of the broadband market, after a surge seen through Covid-19, and subscriber losses in cable TV operations. Moreover, Comcast was hurt by mounting competition from wireless carriers, who have been leveraging their newly built 5G networks to offer fixed-wireless broadband services. However, the stock has gained 56% from a low of about $29 on October 11, 2022. The recovery in the stock since October 2022 was driven by a steady decline in U.S. inflation as well as strength in the company’s movie business, following the success of the Super Mario movie and strong attendance at its theme parks.

Interestingly, CMCSA stock has had a Sharpe Ratio of 0.2 since early 2017, lower than the 0.6 figure for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Returning to the pre-inflation shock level means that CMCSA stock will have to gain about 27% from here. However, we do not believe that will materialize anytime soon and estimate Comcast’s valuation to be around $48 per share, about 10% ahead of the current market price. While Comcast’s relatively steady cash flows from its broadband operations and the strong performance of its theme parks are positive, the company’s TV business faces pressures, amid high inflation and weaker spending by marketers.

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Our detailed analysis of Comcast upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

 

2022 Inflation Shock

Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to a high demand for goods; producers were unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
  • April 2021: Inflation rates cross 4% and increase rapidly
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
  • October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
  • Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how CMCSA stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

CMCSA and S&P 500 Performance During 2007-08 Crisis

CMCSA stock declined from nearly $24 in September 2007 (pre-crisis peak) to $13 in March 2009 (as the markets bottomed out), implying CMCSA stock lost almost 50% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $17 in early 2010, rising 29% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

CMCSA Fundamentals Over Recent Years

Comcast’s revenues rose from $109 billion in 2019 to $121.4 billion in 2022, as higher broadband net adds through the pandemic helped the company offset some of the other disruptions to the business, such as the impact of theme park closures. Comcast’s earnings rose from around $2.87 per share in 2019 to $3.09 per share in 2021, although it declined to about $1.22 per share in 2022.

Does CMCSA Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

CMCSA total debt declined from $102 billion in 2019 to $95.5 billion in 2022, while its total cash has remained roughly flat at about $5.5 billion. The company reported operating cash flows of about $26 billion in 2019 and the metric has largely ranged around these levels in recent years. While the company’s net debt is high, relatively stable cash flows reduce the financial risk for the stock.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Comcast (CMCSA) stock has the potential for some gains once fears of a potential recession are allayed.

 Returns Oct 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 CMCSA Return 0% 27% -36%
 S&P 500 Return 0% 12% 92%
 Trefis Reinforced Value Portfolio 0% 23% 533%

[1] Month-to-date and year-to-date as of 10/2/2023
[2] Cumulative total returns since the end of 2016

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