3 Undervalued Communication Stocks To Buy

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you are looking for ideal communication businesses, there are a variety of investment opportunities out there. While some provide stable profit growth, others are takeover or breakup opportunities. The former carries lower risk for reduced reward; the latter carries greater risk for greater reward. To not go all in on safety or reward, you should diversify between the stocks mentioned below.

Comcast (NASDAQ: CMCSA): Strong Returns, Excellent Direction

In the third quarter, Comcast delivered strong results with growth recorded across all major segments. Revenue in cable grew 7% while the company's entire top-line came out 3% ahead of consensus. Earnings more than doubled (155%) from record wireless spectrum momentum and the sale of the stake in Universal to A&E. Around $1.9 billion was returned to shareholders in the form of dividends and share repurchases. Perhaps most importantly, cable has done well with gains in all residential products. Video subscriber losses were reduced by 48,000, and 123,000 net adds were seen in the voice business.

Going forward, I expect strong returns in the fourth quarter with advertising growth and continued improvement in video. New video services X1 is being rolled out and management has expressed a strong balance between volume and rate. While rates have been going up, volume has been reduced. NBCUniversal has meanwhile been structured with solid liquidity, and the partnership with GE is helping to mitigate risk. And the political environment--as any media source will tell you--was very active this Presidential election.

Even though the stock looks expensive at 16.2x and 15.8x past and forward earnings, it merits these multiples. Moreover, they are actually quite low compared to the historical 17.4x average PE multiple over the last 5 years.  EPS has climbed steadily but dramatically from $0.27 in 2004 to $1.50 last year--a CAGR of 27.8%. Free cash flow growth has been similarly strong rising from $2 billion in 2007 to $9.8 billion today, which means a yield of 10.4%. Combined with the company's strong economic moat, Comcast provides compelling risk/reward.

Time Warner Cable (NYSE: TWC) & Cablevision (NYSE: CVC): Both "Buys"

Time Warner, like Comcast, has also been on a roll. It is up 42.3% for the year to date and still trades cheaply at around 13x past earnings. Analysts expect EPS to grow by 13.4% annually over the next 5 years. Assuming expectations are met, 2016 EPS will come out to $10.08. At a multiple of 16x, this translates to a future stock value of $161.28, or around $100 in present terms. Free cash flow, on the other hand, could be stronger. It stands at $2.3 billion today (where it has hovered over the past 5 years), which is only an 8.4% yield against the market capitalization.

During the third quarter, political advertising accounted for around half of the 22% advertising growth. Between 50-60% of total annual political spending falls in the 4th quarter, so investors should expect greater stability in at least the next two months. Improved sourcing has also laid the foundation for greater gross margins. The Insight acquisition has helped unlock value through the distribution of net operating losses to lower income tax payments.

So, while Time Warner and Comcast may be relatively defensive communication picks, what about a riskier stock for possibly higher returns? This kind of risk/reward can be found in Cablevision, which has been cited by many as a potential buyout target. The Dolan brothers, the leading executives, have twice attempted to take the business private. It recently gained 3.2% in value from a Bloomberg report that Citi and JPMorgan have been hired to find an acquirer of Cablevision's Bresnan Broadband. Although Cablevision may never be sold in full, its parts could be accretive to various media businesses. Among the potential buyers are PE firms, Suddenlink, and Charter Communications. While volatility is quite high at a beta of 1.5, the 4.3% dividend yield at least helps to reduce some of the risk.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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