A Look At The Intrinsic Value Of Comcast Corporation (NASDAQ:CMCS.A)

Does the share price for Comcast Corporation (NASDAQ:CMCS.A) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. I will use the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not January 2018 then I highly recommend you check out the latest calculation for Comcast by following the link below. Check out our latest analysis for Comcast

The method

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow forecast

2018 2019 2020 2021 2022
Levered FCF ($, Millions) $11,555.95 $12,041.14 $13,320.20 $13,014.00 $14,503.00
Source Analyst x14 Analyst x7 Analyst x5 Analyst x2 Analyst x1
Present Value Discounted @ 10.19% $10,487.40 $9,917.28 $9,956.30 $8,827.96 $8,928.32

Present Value of 5-year Cash Flow (PVCF)= $48,117

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.5%. We discount this to today’s value at a cost of equity of 10.2%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = $14,503 × (1 + 2.5%) ÷ (10.2% – 2.5%) = $192,532

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = $192,532 / ( 1 + 10.2%)5 = $118,526

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $166,644. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of $35.66, which, compared to the current share price of $42.44, we find that Comcast is fair value, maybe slightly overvalued at the time of writing.

NasdaqGS:CMCS.A Intrinsic Value Jan 16th 18
NasdaqGS:CMCS.A Intrinsic Value Jan 16th 18

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Comcast as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 10.2%, which is based on a levered beta of 1.025. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For CMCS.A, there are three important factors you should look at:

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.