Part 2 – Lesson 4
The share count is the measure by which investors can track ownership of a company. When we have multiple owners of a company, it is most efficient to track ownership of the company by counting the number of shares rather than simply assigning ownership percentages. For example, if John’s Pizzeria had two 50/50 partners, who were the only owners of the business, it is not necessary to have a share count since it is very easy to simply allocate all the income of the business 50% to each partner.
However, in a publicly traded company with thousands of investors, it is not feasible to assign various ownership percentages to each individual, particularly since these ownership percentages are constantly changing as new shares are issued, existing shares are repurchased by the company, and existing shares are bought and sold amongst investors.
Let’s imagine that John’s Pizzeria was raising equity from multiple investors, so it issues 1000 shares to its investors at $100 each to raise $100,000 at the beginning of its operations. With the 1000 shares outstanding, some investors may own 1 share or 10 shares or 500 shares. These investors may sell their shares or purchase more shares, so we will simply track the ownership of John’s Pizzeria by dividing the shares owned per investor by the total shares outstanding. For example, if Investor A owns 100 shares of John’s Pizzeria, then, this means Investor A owns 10% of the overall equity of the company.
When John initially raises the $100,000 of equity for his business, the market value of the equity and the book value of the equity is the same at $100,000. As John grows the size of his business, then, the market value of the equity may grow.
The market value of equity is also referred to as “market capitalization” and the two terms are used interchangeably.
Let’s imagine that John’s Pizzeria, after its first year of operations, has been very successful in growing its net income, and as a result, its stock price has increased to $150 per share. What is the new market cap of John’s Pizzeria?
Market Cap = Stock Price * Shares Outstanding
John’s Pizzeria Market Cap = $150 * 1000 = $150,000
John has successfully increased the value of the common equity from $100,000 to $150,000, so all his investors have seen a 50% gain in the value of their stock in its first year. You may be wondering at this point how the $150 stock price for John’s Pizzeria has been calculated. We will discuss this in more detail throughout Part 2.
Calculating the Market Capitalization of Comcast
To calculate the market cap of CMCSA, we need two pieces of information: 1) the share count and 2) the stock price.
Follow the instructions below to pull up the 10-Q or 10-K filings for CMCSA from the www.sec.gov website. Remember – the 10-Q filing is the quarterly financial statement filing that public companies make, whereas the 10-K filing is the annual filing. Depending on the time of the year, you will need to either pull up the 10-Q filing or the 10-K filing to find the most recent share count.
We will pull up the 2017 10-K filing for CMCSA:
1. Go to sec.gov and type in “CMCSA” in the EDGAR search bar below.
2. When you get to the next screen, you will see all the SEC filings for CMCSA. To find the 10-K filing, type in “10-K” in the Filing Type search bar and hit enter.
3. At the next screen, we have now narrowed down the filings to just the annual 10-K filings. Click on the most recent 10-K filing to retrieve the actual filing.
4. There are at least two places in the 10-K filing to find the share count. The first place will be on the very first page of the 10-K filing. Typically, the company will state the total number outstanding share as of the last day of the quarter (or year) on the first page. We added the red outline box below to show where CMCSA lists their share count. CMCSA states, “As of December 31, 2017, there were 4,635,063,642 shares of Comcast Corporation Class A common stock and 9,444,375 shares of Class B common stock outstanding”
To calculate the share count, we should add the Class A shares and the Class B shares together. For CMCSA, Class A and Class B shares are both part of the common equity and share in the profits of the company. Class A and Class B shares are typically created when one Class receives better voting rights than the other Class, but typically, the economic ownership is the same. Adding these two together, we get 4.644 billion shares.
Please note that the share count listed on the first page of the 10-K is the basic share count. The basic share count does not incorporate dilution for shares that may be issues because of stock options to employees or other dilutive securities (such as convertible preferred stock).
The second place to find the share count of the company is usually in the income statement. If we scroll down to page 63, we find the CMCSA income statement. However, CMCSA lists the basic earnings per share (EPS) and the diluted EPS without showing the share counts.
We can back into the basic and diluted share count by dividing the $22.714 billion of net income by the $4.82 basic EPS. This gives us a basic share count of 4.712 billion shares. If we use the $4.75 diluted EPS, we get a diluted share count of 4.782 billion shares.
You man notice that the basic share count on the front page of the 10-K is 4.644 billion vs. the basic share count from the income statement is 4.712 billion. Why are these two different? The difference is due to the timing of when the two are measured. The front page of the 10-K shows the share count on December 31, 2017. However, the calculation of EPS requires the company to use the average share count over the course of the quarter or the year. If CMCSA reduced its share count throughout the course of the year by buying its own shares back, then, it is conceivable for the ending share count to be lower than the average share count.
Lastly, you will also notice that the diluted share count is higher than the basic share count. This is to account for additional common shares that are likely to be issued to employees.
As an investor, it is often prudent to use the diluted share count since it provides a more conservative view of the EPS or free cash flow per share of the company.
Having now identified the diluted share count of CMCSA of 4.782 billion shares, let’s now calculate the market cap of CMCSA. We will use the stock price on December 29, 2017. As of this date, the CMCSA market cap is $191.5 Billion.
Diluted Share Count 4.782 billion x Stock Price $40.05 = Market Cap $191.5 billion