Friday, February 25, 2005

Investment Roundtable - Comcast Corporation (Nasdaq: CMCSA)

This week the Investment Roundtable is taking on Comcast Corporation (NASDAQ: CMCSA). Comcast is the largest cable TV system operator in the US, with around 21.5 million subscribers in 35 states. Comcast currently has a market cap of around $44 billion according to Standard and Poor’s, which puts it at the top of the pack.

The big news, I believe, with Comcast are the recent investments by my sworn enemy…Mr. Warren Buffett. It seems that Mr. Buffett doubled Berkshire Hathaway’s holdings of Comcast to the tune of $328.4 million as of December 31st. This is very interesting. Most value investors would not suspect this move. Recent actions by the famed investor have really sparked thoughts of changed investment practices.

Let’s take a look at the fundamentals that Benjamin Graham was so fond of to see if we are missing something:

P/E 76.5: No, Benjamin Graham criteria would require a P/E below 20

Price/Book 1.76 = No, BG criteria requires a P/B of below 1.5

Current Ratio 0.4 = No, BG criteria requires a CR greater than 2.0

Revenue Growth (5-Yr Avg) 27.82 = Yes, BG criteria requires a growth rate of at least 15%

Intrinsic Value $23.30 (S&P Fair Value) = No, BG criteria requires the stock to be below intrinsic value by at least 15%

Yield 0% = No

Comcast passed one out of six of our Benjamin Graham value tests, which give it a score of 16.67%. Definitely not a passing grade. We can also take a look over at Nasdaq.com to see what they think Benjamin Graham would think of this stock. You can look yourself for this and any stock at their Guru section. Nasdaq.com’s Guru section gives CMCSA a score of 29%. Here is what they had to say in detail:

SECTOR: [PASS]

CMCSA is neither a technology nor financial Company, and therefore this methodology is applicable.

SALES: [PASS]

The investor must select companies of "adequate size". This includes companies with annual sales greater than $340 million. CMCSA's sales of $20,307.0 million, based on trailing 12 month sales, pass this test.

CURRENT RATIO: [FAIL]

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. CMCSA's current ratio of 0.41 fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL]

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for CMCSA is $20,093.0 million, while the net current assets are $-5,100.0 million. CMCSA fails this test.

LONG-TERM EPS GROWTH: [FAIL]

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for CMCSA were negative within the last 5 years and therefore the company fails this criterion.

P/E RATIO: [FAIL]

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. CMCSA's P/E of 75.96 (using the current PE) fails this test.

PRICE/BOOK RATIO: [FAIL]

The Price/Book ratio must also be reasonable. That is, the Price/Book multiplied by P/E cannot be greater than 22. CMCSA's Price/Book ratio is 1.76, while the P/E is N/A. CMCSA fails the Price/Book test.

So, Comcast is not a value play. Why would Buffett be interested then? I don’t know, but I’m sure he does. The other Buffett investment that threw me for a loop was his purchase of LVLT’s bonds until he pretty much doubled his investment in a few months. He’s not one of the best investors of our times for no reason.

The one trend that is definitely going for this company is that I don’t think American’s are going to stop watching cable TV any time soon. Cable providers are even aggressively capturing market share in the telephone service and high-speed internet connection realms.

George Soros has also made a recent investment through his purchasing of Time Warner (NYSE: TWX) shares. These two great investors could be on to something here. But there is also a bearish case according to the Financial Times: “Still, the cable companies are far from in the clear. They remain a favourite sector of bearish hedge funds who feel the group still faces the risk of "disintermediation", or removal of the middle man. Cable companies' advantage has long been being the "pipe" that delivers content into the home, but with content being increasingly delivered over the internet but as internet delivery increases, the need for the "pipe" lessens.

There is certainly going to be massive competition, but betting against Mr. Buffett and Mr. Soros is something most investors are not want to do.

Now let’s take a gander at the charts to see if we can find where the supply and demand are popping up. As always, I will start with the monthly view:


Click to Enlarge Monthly Chart Posted by Hello

As we can see from the monthly chart, most of us would have had liked to have been investors in Comcast in 1997. Hindsight is obviously 20/20, but a man can dream. The point of these roundtables is to let our readers know if we would be investors today, at this very second. My initial reaction would have to be a no, but maybe soon.

I wouldn't be an investor in Comcast until it breaks above its newest downtrend that began at the beginning of 2004. This could be easy and it could be difficult, but that is not the point. The point is that as an investor, it would be nice to see some strenght on this follow through.

Comcast has made a higher high and a higher low from its bottom it made in 2002. Now, we want CMCSA to prove to us investors that it has the strenght and the will to continue this move upward. Mr. Buffett believes it will, but I will let the charts prove it to me.


Click to Enlarge Weekly Chart Posted by Hello

The weekly view doesn't add much to the debate. The same trendlines jump out at me. I do however like how Comcast has held above its 200-Week MA. You can also see that CMCSA is getting close to the point of decision. The downtrend and uptrend are soon to converge and Comcast will have to choose whether to go higher or continue the downtrend lower.


Click to Enlarge Daily View Posted by Hello

Again, nothing really jumps out at me in the daily chart that I couldn't see in the monthly or weeky. CMCSA seems to have found some support at the 50-Day MA and we shall see how long that lasts for. Comcast has finally filled the gap and could be heading back down to re-test the uptrend line. The stochastics are in overbought territory and the RSI is trending lower.

In summary; I wouldn't want to be on the other side of a Warren Buffett trade, but I don't think Comcast has proven anything to us investors yet. Comcast is definitely not a value play and is in a tough competitive industry so this is not an investment that interests me. If you are compelled by the Comcast story, I would keep my money on the sidelines until CMCSA breaks above the $33.25/share level with some oomph.

P.S. Check out the other contributors of the Investment Roundtable. They are all very insightful and worth your time:

Technically Speaking (Blog Formerly Known as Ron's Stock 'n Stuffer World)
Sixthworld Management and Commentary
Jaloti

Best Regards,

The Soothsayer of Omaha

4 Comments:

Blogger Byrne Hobart said...

This isn't always Buffett -- usually, the smaller positions are actually Simpson, who runs GEICO's portfolio (and is a great investor in his own right). He doesn't adhere to such strict value standards, and compensates for it by having a more diversified portfolio.

12:24 PM  
Anonymous Soothsayer of Omaha said...

Byrne,

Thanks for the comment. I did know that Buffett is not always the one investing the company cash. The thing I find interesting is that he let's the newspapers and financial press print that he himself makes these investment decisions. The "Buffett" name alone probably makes these investments winners, but the guy deserves it I guess.

Best Regards,

The Soothsayer of Omaha

1:42 PM  
Blogger Byrne Hobart said...

He usually refuses to comment, because that's really the safest strategy -- if he says "This isn't one of mine," the press will know that when he doesn't comment, it is his pick. And if he always tells the complete truth, prices will adjust too fast for him to take a meaningful position. But still, it's a good stock to analyze, inasmuch as Simpson uses lots of similar strategies, and invests -- I presume -- how Buffett would if he had one tenth the capital and many times the risk/volatility tolerance.

7:03 AM  
Blogger Gary said...

Keep up the good work.

2:42 PM  

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