Communications stocks have had a rough go this year amid soaring inflation and interest rates and a slowing economy.
The S&P 500 Communications Services index has dropped 24% year to date, much more than the 10% decline for the S&P 500 overall.
The slide has left communications stocks trading at a 37% discount to Morningstar analysts’ fair value estimates. But that means buying opportunities.
Dave Sekera, chief U.S. market strategist at Morningstar, offered three stock picks among the undervalued communications companies.
Morningstar analyst Neil Macker assigns the company a wide moat and puts fair value for the stock at $170. It recently traded at $124.60.
“Media companies, including Disney, are in the midst of rolling out their content on to their own streaming platforms,” Sekera said.
“This has led to a short-term disruption in performance, but we think Disney remains the best-situated traditional media firm to navigate the transition to streaming.”
Macker noted Disney’s streaming gains reported in its latest quarterly earnings on Aug. 10. Disney+ added 14.4 million customers globally in the quarter, compared to a loss of 900,000 for Netflix, he said.
In addition, Disney’s parks, experiences, and products division “posted very strong top-line growth of 70%, despite ongoing shutdowns at Chinese parks,” he said.
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Morningstar analyst Michael Holdel gives the company a wide moat and puts fair value for the stock at $60. It recently traded at $40.19.
“Comcast has been under pressure from slowing broadband consumer growth and concerns surrounding increased content costs,” Sekera said.
“However, we still forecast that Comcast will grow broadband revenue through the combination of modest consumer additions and solid pricing power.”
Holdel says cash flow is the key issue. “Very modest broadband growth is likely here to stay,” he wrote in a commentary.
But, “we believe investors are better served focusing on the firm’s ability to generate strong cash flow, despite lingering pandemic headwinds, and to return that cash to shareholders.”
Morningstar analyst Ali Mogharabi assigns the company a wide moat and puts fair value for the stock at $346. It recently traded at $178.
“We think the market is being overly pessimistic regarding the decrease in ad prices following privacy measures rolled out by Apple,” Sekera said.
“With its large and still growing user base, Meta remains one of the premium platforms for long-term secular growth in digital advertising.”
While Meta’s second-quarter earnings were disappointing, “our main takeaway … was that the main issue facing the firm is a potential downturn in the economy,” Mogharabi wrote in a commentary.
“We were pleased with user growth, excluding a decline in Facebook users in Europe…. With continuing user growth, we believe Meta’s network effect remains intact.”