Comcast Posts Solid Performance Amid Strategic Concerns

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Comcast (CMCSA) has become a difficult company and stock to analyze.  The latest quarterly earnings report indicates 2018 is off to a decent start but not without significant challenges that reinforce the long-term concerns about video subscriber losses and broadband competition.  Complicating matters further is the company’s offer to buy Sky, the dominant satellite TV company in the U.K and Europe.  There is also still well reported speculation that Comcast is interested acquiring most of 21st Century Fox that Disney has agreed to buy.

There is plenty to like about Comcast.  Despite the well-publicized subscriber losses in cable TV, broadband subscribers and ARPU are still growing and growth in business customers remains at double digit levels.  In 1Q18, cable revenue grew 3.6% and cable EBITDA grew 4.7%.  Cable faces challenges but the sky is not falling yet.  Programming expenses grew only 3%, the first sign of a long awaited slowdown that should remind investors that moderate subscriber losses in cable TV are not the end of the world.

Leaving aside the Olympics, NBCU grew revenues nicely and had a 13.1% increase in EBITDA.  NBCU’s continued strong growth is important given that its historical success is being offered by management as a blueprint for why Sky and possibly Fox assets are the correct strategy.

The balance sheet and cash flow remain in great condition.  Debt to EBITDA is an industry low 2.2X, firmly in investment grade territory.  Capital spending has peaked in absolute dollars and relative to revenue, powering free cash flow.

Presently, an investment in Comcast comes down to balancing solid near-term financial performance against long-term secular challenges and the company’s M&A strategy.  Northlake thinks the company and the cable industry can perform better than the consensus expectation as video subscribers fall, leaving our primary concern around M&A.  Management rightly points out that the NBCU deal has been a home run.  Furthermore, the attempt to buy Time Warner Cable that was blocked by the FCC and DOJ was clearly a smart move.  Looking further back, Comcast was built by acquisitions and has created a lot of shareholder value.  Our concern is that the acquisition history is not indicative of success for the current Sky and Fox strategy.  The cable and TV network industry has changed.  Subscribers, ratings, and advertising are falling and the well-established trends of OTT viewing, driven by Netflix, are firmly in place.  We understand that Comcast believes M&A is the right strategy to fight back against these trends.  The DNA of large corporations is to grow. Northlake would prefer the company to use its balance sheet and free cash flow strength to buy back stock and raise the dividend.  This is the clearest and safest path to enhance shareholder value in the challenging and still rapidly evolving media landscape.

CMCSA shares are trading at under 8X EBITDA.  Backing out NBCU, whose peers trade at a premium, leaves the cable business valued at near 7X.  Even with the secular challenges and lingering questions about acquisition strategy, this valuation incorporates a lot of negativity.  Northlake has more concerns about CMCSA than it has had in some time but based on our long, successful association with the management team, we are sitting tight pending the outcome of the Sky and possibly Fox transactions.  We think the shares belong in the low $40s and would be sellers near those prices.

CMCSA is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CMCSA is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Comcast Reality Ahead of Fears

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Comcast (CMCSA) reported an inline quarter with upside in the closely watched video and broadband subscriber metrics.  Consolidated revenues grew 4% and adjusted EBITDA was flat after taking into account $171mm in employee bonuses related to tax reform.  The cable business grew revenues 3% and adjusted EBITDA 4% as margins expanded. NBC Universal had 4% revenue growth and 6% EBITDA growth.

Comcast raised the dividend by 20% and announced another share buyback of “at least $5 billion” after repurchasing $5 billion CMCSA shares in 2017.  Other guidance commentary for 2018 was positive with cable margins expected to expand by up to 50 basis points and capital spending intensity in the cable business expected to fall.

CMCSA shares continue to be a battle between the bull case of modest growth in financial measures and the bear case of increased competition for video and broadband subscribers.  Our favorite analyst of the cable sector, Craig Moffett of MoffettNathanson Research put it well:

“By now the litany of worries that has kept investors on the sidelines should be familiar to everyone.  Video subscribership is being hammered by cord cutting.  Video margins are being squeezed by vMVPDs.  Broadband industry growth is hitting a wall.  AT&T is expanding its fiber footprint.  Verizon is deploying 5G wireless.  Cables growth phase must be over.

Against this bleak narrative, it may come as a surprise that Comcast’s Fourth Quarter video subscriber losses were better than expected (just a little over 1/10th of 1% in the quarter), broadband subscriber growth was also better than expected, and consolidated revenue growth was healthy 4.2% for the quarter and 5.1% for the year.”

The key to the bull case on Comcast is the balance sheet.  The company guided its long-term leverage ratio of net debt to EBITDA to the current level of 2.2X.  This is among the lowest in the media and communications industry and is a real strength for the investment case given secular headwinds.  This target also strongly suggests that the “at least” part of the buyback announcement is conservative.  Free cash flow should be north of $10 billion again and the new buyback and dividend will only consume about $8.5 billion.  EBITDA growth will add another $3 billion of free capital against the 2.2X leverage target. Looking out several years, Comcast should have annual excess free cash flow of $10 billion.

On the call, management said its balance sheet was of “strategic value.”  We interpret this to mean that the company may be looking to participate in the wave of consolidation underway in the media industry.  We know Comcast was a player for the Fox assets being purchased by Disney.  Discovery Communications and Scripps Interactive are merging.  CBS and Viacom merger discussion may be back on.  AT&T is trying to buy Time Warner.  T-Mobile and Sprint came close to merging and may try again.

We strongly suspect that Comcast is awaiting the outcome of government review of all these mergers, especially the upcoming court case between the DOJ and AT&T.  Once it is clear what can pass antitrust review, Comcast will deploy its strategic value.  Importantly, whether that is done through acquisitions or additional share buybacks, it is accretive to the value of CMCSA shares.

Northlake concludes that the bull-bear battle rages on but the shares are worth holding as the valuation on a free cash flow basis outweighs the long-term growth concerns that we believe are worse than the current reality.

CMCSA is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CMCSA is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Is the Bottom In for TV Stocks?

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TV stocks have had a good rally in the past week for the first time since May.  Among Northlake positions, this includes Disney (DIS), CBS Corporation (CBS), and Nexstar Media Group (NXST).  Each has rallied between 5-10% off of at or near 2017 lows.  The challenges facing TV have metastasized this year.  The issues are cord cutting, cord shaving, weak TV ratings, and poor advertising trends.  All the major media companies reported earnings the past two weeks and for TV stocks there were a few signs of improvement.  When combined with horrific sentiment among investors and extremely bearish positioning in the stocks, this has a triggered a rally.

Northlake has a lot of domestic media exposure including cable operator Comcast (CMCSA). It has been a rough ride of late but we reaffirm that we own the very best positioned companies given the secular headwinds.  This was evident in recent earnings reports from all four companies.  Our recent report on CMCSA can be found here (http://northlakecapital.com/2017/10/27/comcast-posts-solid-results-despite-increased-competition/).  Below are comments related to recent results from DIS, CBS, and NXST:

Three items are supporting the recent rally in TV related stocks.  First, there appears to be material uptake of OTT services providing a boost to subscriber counts for networks and stations that are included in the new packages.  DIS, CBS, 21st Century Fox (FOXA), and AMC Networks (AMCX) each indicated that affiliate and/or retransmission fees were beginning to see some benefit from OTT subs.  These subs act to offset losses due to cord cutting when a customer switches from traditional cable or satellite subscriptions to an OTT service.  Second, the outlook for fourth quarter advertising growth has improved.  Ratings remain weak but October was strong, lapping political displacement a year ago, and early pacing for November and December are positive on a year-over-year basis.

The third positive relates to investor sentiment and positioning.  We cannot emphasize enough how bearish the outlook has been for traditional media stocks.  Analysts have downgraded many stocks and reduced estimates and price targets.  The valuations on the stocks against earnings and cash flow are at levels not seen since the 2007-2009 Great Recession.  One analyst we respect noted that NXST was trading as though its prodigious free cash flow would disappear in six to eight years.  The TV industry may be in tumult but that is an awfully pessimistic view.  The bearish sentiment was so overwhelming that when fundamentals did not deteriorate and the stocks went up on weak earnings, a countertrend rally developed.  We think the rally will have legs, especially in our portfolio names given they have the best competitive positioning versus the secular challenges.

DIS reported worse than expected and laid out further detail on its 2018 outlook.  The stock initially traded down 3-4% but reversed ruing the company’s conference call and is up 2% now on the morning after they reported.  One positive was a lower rate of sub losses for ESPN, down -3% versus a recent accelerating trend that saw the prior quarter fall by -3.5%.  Management also laid out further detail on expenses related to its recent BAMtech acquisition and the rollout of its direct-to-consumer services for ESPN and Disney.  The upfront losses in 2018 appear less than many investors anticipated.  DIS also faces a slower rate of programming expense growth at ESPN as the huge step up in NBA rights fees occurred in the past year.  All of this clears the deck for what should be a huge year for DIS’s studio with two Star Wars, three Marvel, and two Pixar films hitting theaters.  These films should support continued solid trends at the company’s theme parks and acceleration in the consumer products business.  Northlake does not see a ton of upside for DIS in the next year or two during the transition phase from traditional distribution via cable and satellite to OTT but in the near-term the relief rally could build.  If that happens, it will be time to make a tough call on holding DIS shares.

CBS remains much less exposed to secular headwinds than other TV network companies as it owns no cable networks and has a head start with early success from its own OTT services CBS All Access and Showtime.  In addition, broadcast networks like CBS remain sharply undervalued as far as retransmission fees compare to their popularity with viewers.  CBS will double its retransmission fees in the next three years which not only can drive operating income growth but also reduces the company’s exposure to secular and cyclical challenges for advertising.  Among the large traditional media companies, we find CBS the most attractive given its assets, strategy, execution risks, and management.

NXST is the second largest owner of local TV stations in the United States serving mostly small and mid-size cities.  We have a long history with NXST at the Entermedia hedge fund and find their management team to be the best in the business.  Even in a cheap group of local broadcasting stocks, NXST stands out as a great value.  Free cash flow per share is about 20% of the current stock price even after a 10%+ rally in the shares.  Local TV faces many of the same issues as other traditional media with the added challenge of rapidly rising payments to the big four networks (ABC, CBS, FOX, and NBC) for the right to maintain their affiliations.  Nonetheless, many positives exist including the ability to create shareholder value from the massive free cash flow by paying down debt, increasing dividends and share buybacks, and buying more stations in highly accretive transactions.  Each of these positives should become more evident in the year ahead when the FCC loosens local station ownership rules (expected later this month) and political advertising drives the biennial boost to revenues an cash flow.

CBS, DIS, NXST, and CMCSA are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CBS, DIS, NXST, and CMCSA are net long positions in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Comcast Posts Solid Results Despite Increased Competition

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Comcast (CMCSA) reported in line results for 3Q17 although admittedly expectations on subscriber metrics had been reduced after the company adjusted its guidance.  Financial results matched initial expectations and were never adjusted lower despite the lower subscriber counts.  Comcast shares fell 15% from all-time highs since the company announced in September that they would lose 100,000-150,000 video subscribers in the third quarter against expectations for a very small gain.  They also indicated a lower rate of growth in broadband subscribers.  Despite the sub losses, the company said financial results would not be impacted and that turned out to be the case.  Investors worry that steadily declining video subs and falling growth in broadband subs will eventually halt or reverse financial growth.  We think this scenario is unlikely and find Comcast shares to have overreacted.  We do not expect a quick move back to new highs and some further downside is possible.  However, we remain confident the shares will regain their footing and can move to the mid-$40s in 2018.  This is more than 20% upside against what we now see as minimal downside.  Comcast has a very strong balance sheet and improving free cash flow which gives us comfort in showing patience.

The rise of OTT services like Netflix and skinny cable packages like DirecTV Now that are delivered over the internet is leading to people cutting the cord or slimming down the video package they buy from their cable company.  This transition has happened faster than Northlake expected and appears to be accelerating.  It would clearly be better for Comcast if they could hold onto more customers with big channel bundles.  However, the company is still able to grow revenue and cash flow because it controls the best broadband pipe to your house or workplace.  Comcast is gaining market share of broadband and can raise broadband prices as the connection becomes ever more valuable in an OTT world.  In fact, a cord cutter loses the discount on the bundle of video and broadband creating a built in price increase for Comcast.  Additionally, broadband is a much higher margin product for Comcast than video since Comcast does not have to effectively transfer half or more of the video price subscribers pay to the TV networks.  The bottom line is that as Comcast becomes primarily a broadband supplier with various services riding on their network, they are protected financially.  We believe this will become apparent over the next several quarters, allowing Comcast shares to regain recent losses and set new highs.

One final point…Comcast is well prepared for the transition from a cable TV company to a broadband company. The X1 set top box is clearly the best user interface and has been licensed by other leading North American cable companies.  Netflix and YouTube are already integrated and the navigation and voice remote rival anything in the OTT world.  The company has also focused on growing its commercial service and expanding into home services like security systems.  Commercial and home security are more than 20% of revenue and growing double digits.  X1’s success can be noted by the fact that Comcast sub losses are well under 1%, while peer cable and satellite companies are losing 2% or more of their subs.  Thus, another reason we are sticking with Comcast is because management has proven quite competent and alert to the changing marketplace.

CMCSA is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CMCSA is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Comcast Continues to Overcome Cord Cutting Fears

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Despite lots of discussion of cord cutting and cord shaving and merger rumors, Comcast continues to produce good financial and operating results.  Furthermore, management is careful with the balance sheet by keeping debt levels low and appears to be cautious about the need for a big acquisition.  We like the steady growth and low risk corporate strategy in a world where the potential for volatility in financial markets, economics, and sociopolitical developments appears high.  Also keeping us invested in CMCSA is the likelihood that growth in the core cable business accelerates next year as unusually high programming expense growth normalizes.  On a P-E or enterprise value to EBITDA basis, we could see CMCSA shares in the upper $40s over the next 6-12 months.

In 2Q17, CMCSA reported revenue and EBITDA growth of 10%.  NBC Universal led the way with 17%/23% revenue/EBITDA growth.  The large cable business grew a solid 5.5%/5.4%.  NBCU is unlikely to sustain these growth rates but is arguably the best positioned traditional entertainment company in an industry facing secular challenges from cord cutting, cord shaving, weak linear TV ratings, and loss of advertising market share to digital.  Strong performance by the NBC Network, a real growth opportunity in theme parks, and a film studio with several big franchises (Minions, Fast and Furious) should allow the company to weather the storm clouds facing broadcast and cable TV networks.  If the core cable business can grow mid to upper single digits over the next few years as we expect, NBCU should add to overall corporate growth.

Speaking of the core cable business, there was a lot of nervousness around this quarter given weak second quarter seasonality (snowbirds and college students disconnect for summer) following a marked acceleration in cable TV subscriber losses in the first quarter.  Albeit against lowered expectations, Comcast subscriber numbers were not too bad.  Total customers relationships grew 114,000, slightly below expectations but better than feared.  Cable TV subs fell 45,000, again not as bad as the whispers.  One thing to keep an eye on is high speed data subs which grew by 140,000 but fell short of realistic expectations.  High speed data remains the key growth driver for cable TV revenue and there are legitimate concerns surrounding peaking penetration for wireline broadband.

The balance sheet remains in great shape.  Debt leverage sits at 2.2 times EBITDA, one half to one third the level of other large cable companies.  Free cash flow beat expectations and capital spending is under control with no major new projects in the near future.  Management is steadily buying back stock and annual dividend increases can be expected.

Finally, a comment on merger and acquisitions given the near daily rumors of Comcast being interested in buying “something.”  Comcast has a history of pursuing aggressive acquisitions, having tried to buy Disney, acquiring NBCU, acquiring AT&T Broadband, and being blocked by regulators from buying Time Warner Cable.  Despite that history, we trust management which notes they have all the assets they need and rumored targets in wireless or cable or content all own worse performing businesses than Comcast.  Specific to wireless, we accept that for the next several quarters at least Comcast will focus on Xfinity Mobile and learn the ropes rather than pursue a major acquisition like Sprint, T Mobile, or Verizon.  If there is one deal we would like to see, it would be an acquisition of Charter Communications to create a nationwide broadband company to compete with the nationwide wireless and internet companies.  Regulatory approval would be tough and public outrage would be high but perhaps approval of the pending AT&T-Time Warner transaction would leave an opening and be a signal from regulators that buying Charter might be possible.

CMCSA is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CMCSA is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

To Xfinity and Beyond

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Comcast reported another good quarter and the shares are moving up to another all-time high.  CMCSA shares are befitting from two factors.  First, the company continues to execute almost perfectly on all financial and operational metrics.  Second, the threat of onerous cable regulation has fallen sharply under the Trump Administration.  Putting the long history of excellent quarterly results together with the reduced regulatory threat and a very strong balance sheet and Comcast has emerged as a blue chip stock.  We see further upside as the valuation of the shares expands to reflect its blue chip status and financial results stay consistent at mid to upper single digit growth in revenue and operating cash flow.

In 1Q17, Comcast grew revenue by 8.9%, adjusted EBITDA by 10.4%, and earnings per share by 26.2%.  The cable business saw 5.8% revenue growth and 6.3% adjusted EBITDA growth.  Margins expanded as all operating expenses except programming expense (fees paid to TV stations and networks for the right to transmit their programming) grew at a rate below revenues.  Programming expenses are up double digits again this year but should normalize in 2018 and grow around the rate of revenue.  This sets up nice margin expansion potential in 2018 and beyond.

Supporting the long-term outlook at Comcast is the fact that cable subscribers are actually growing.  Yes, you read that correctly.  Despite all the talk about cord cutting, Comcast actually has about 1% more video subscribers now than a year ago.  This is a testament to the excellent management and smart and effective investment in its X1 platform.  Cord cutting is real.  Total cable and satellite subscribers in the U.S. are down about -2% from a year ago.  Risk remains but Comcast deserves credit for its management decisions and execution.  With video stable, Comcast continues to benefit from growth in broadband subscribers and business customers.

Not to be overlooked is excellent performance at NBC Universal.  The entire division grew revenue 14.7% and Adjusted EBITDA by 24.4% in 1Q17.  All four segments – Cable Networks, Broadcast Television, Filmed Entertainment, and Theme Parks – grew revenues and all but Theme Parks saw improved profit margins.  Theme Parks had an unfavorable comparison on spring break timing.  Comcast bought NBC Universal in 2011 and the acquisition has turned out even better than ever could have been expected.  Once again, management decision-making and execution has been consistently on target. Furthermore, restrictions placed on Comcast to complete the acquisition of NBC Universal expire in 2018, creating options for leveraging NBC Universal’s content such as launching a standalone internet TV package.

Comcast shares closed at $30.76 the night before the election.  Trading today at $40, the stock is up 30% since then.  We see upside to $45-50 over the next year as the EBITDA multiple expands reflecting the company’s blue chip status, reduced regulatory risk, and continued consistent growth.

CMCSA is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CMCSA is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Steady As She Goes at Blue Chip Comcast

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Comcast (CMCSA) reported another steady growth quarter with revenues up 9%, operating cash flow up 8%, EPS up 10%, and free cash flow up 64%.  Despite emerging completion form internet delivered skinny bundles such as DirecTV Now and Sling, the core cable business remains healthy.  During the fourth quarter, cable revenues rose 7% led by high speed internet.  Video revenue grew and despite all the cord cutting talk, CMCSA added 80,000 video subscribers.  For the year, CMCSA added 161,000 subscribers, the biggest gain in 9 years.  Business services remain a driver with revenue of 15% in the quarter.  Advertising is another growth vehicle, offering double digit gains, particularly in political years.

NBC Universal also continues to have healthy growth led by theme parks, filmed entertainment, and the NBC broadcast network.  Cable networks are also growing despite fears about skinny bundles, albeit growth rates have settled into the low to mid-single digits.

CMCSA shares reacted well the 4Q16 results, rising to another all-time high.  Investors seem comfortable with the company’s outlook for steady growth.  2017 could grow a little slower than 2016 as the company faces higher programming costs and tough comparisons in filmed entertainment and political advertising.  CMCSA will also enter the wireless business in 2017 with a controlled rollout that is likely to slow profit growth by about 1%.  Growth should pick up to high single digits again in 2018.  2017 will still see above average growth for a large cap U.S. company and Northlake expects CMCSA to again use its strong balance sheet and free cash flow to increase the dividend and fund large share buybacks.

CMCSA is a beneficiary of the Trump Administration primarily as the FCC now has a deregulatory bent.  The reclassification of broadband as a Title II service will likely be overturned removing a major overhang from the possibility of government regulated broadband rates.  Easier M&A oversight could also help CMCSA as it decides on its future path in the wireless industry, looks to maintain strength at its local broadcast TV stations, and possibly even expands its cable footprint slightly.  Tax reform should also help CMCSA as the company is wholly domestic and an underleveraged full taxpayer.

CMCSA has emerged as blue chip company over the last few years, even improving its damaged reputation with heavy investments in customer service and innovation.  The company’s X1 platform is best in class and provides excellent competitive positioning in the rapidly evolving and highly competitive cable TV and broadband industries.

Northlake still sees upside for CMCSA shares to the mid-$80s based upon continued steady growth and a sum of the parts valuation that implies the core cable business is still trading for less than 8x EBITDA.  To us, this suggests that there is still too much concern over the changing delivery technologies and competition.  By now, CMCSA has proven they can thrive despite the challenges.

CMCSK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CMCSK is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Comcast: The Cord is Strong

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Despite the almost daily articles about cord cutting and cord shaving and OTT services and the end of cable TV as we have known it, Comcast continues to grow at a steady rate.  In 3Q16, cable revenue grew 7% and cable operating cash flow grew 6%.  Comcast added over 200,000 new subscribers and good old cable TV added 32,000.  Comcast has now added 170,000 video subscribers in the past 12 months.  That is right.  Despite all the doom and gloom, Comcast is growing cable subscribers.  Add that to the company’s best in class broadband product and a growing business serving small and mid-size businesses (now over 11% of cable segment revenue) and Comcast’s largest business unit is doing just fine.

Over at NBC Universal, each business unit – theme parks, cable TV networks, broadcast/NBC, and the film studio is growing nicely.  With AT&T attempting to buy Time Warner, it is worth noting that Comcast’s 2011 acquisition of NBC Universal from General Electric has been a great success from a financial standpoint.

Comcast’s legacy as the bad, customer unfriendly cable company is being put in the past.  The reality is that company has become an innovator and industry leader.  The X1 video platform offers an outstanding interface.  Comcast offers more on demand programming than any traditional or new competitor.  TV Everywhere capabilities now offer over 100 channels of live TV accessible on any device.  This fall, Netflix will be integrated directly into X1.  This is likely the first step of turning X1 into a single source aggregator of all the video needs in a household.  Turn on your TV and go to X1 and all your video options are right there and searchable with a recommendation engine.

A big risk to the cable industry has been losing control of the customer relationship and being disrupted by Apple or Google or Netflix.  Comcast has made a smart strategic move to become the leading aggregator of video content.  This should preserve the revenue and cash flow stream of the video business and allow the growth engines of broadband, business services, and NBC Universal to sustain mid to upper single digit growth in revenues and cash flow.

Comcast has accomplished its strategic transformation with a very strong balance sheet and returns cash to shareholders in dividends and stock buybacks.  In general, media companies carry above average debt.  Comcast’s balance sheet strength is most important as the new threat to its business model comes from the convergence of wireless companies like AT&T and Verizon with the cable industry.  The threat of wireless broadband displacing cable’s wired broadband is already impacting sentiment toward Comcast shares but we see the threat as being well into the future.  In the meantime, steady growth, financial strength, innovative strategies, and strong management execution leave Comcast shares as an attractive and lower risk long-term investment.  Using operating cash flow multiples of comparative companies suggest the stock can reach the mid $70s over the next year.

CMCSA is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CMCSA is a net long position in the Entermedia Funds.

About The Death of Cable…Comcast Proving Otherwise

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It seems like everywhere you turn there is talk about cord cutting and cable losing subscribers.  Well, guess what?  For now at least, the narrative is false, especially at Comcast.  Comcast lost just 4,000 video subs in the seasonally weak second quarter against expectations for a loss of 31,000.  This was the best second quarter subscriber performance in 10 years.  In the last 12 months, Comcast has GAINED 90,000 video subscribers.  What the press and many industry commentators are missing is that the cable industry, led by Comcast, is gaining market share in video from satellite and telco competitors.  Furthermore, recently, it appears the two major OTT competitors, Netflix and Sling TV, are seeing much slower subscriber growth.  Finally, the overall rate of decline for video subscribers is not accelerating over the past few quarters.  This leaves cable in much better shape than generally perceived, something evident in Comcast shares trading at all-time highs, up 20% this year.  Long-term risks exist but for now, Comcast, leading with its best in class X1 set top box software, is growing revenue and cash flow from video.  The company is also investing heavily in customer service and reports that all key customer service metrics regarding incoming calls are improving.

With video growing slowly, Comcast is able to grow the overall cable business at mid to upper single digit rates.  Broadband subscribers grew by over 200,000 in the second quarter, ahead of expectations and the highest growth rate in 8 years.  Commercial revenues from sales to small and mid-size businesses grew 17% in the second quarter and now represent more than 10% of cable segment sales.  At that size and growth rate, the supposedly endangered cable industry starts with 1.7% positive growth before the residential business is even considered.

Comcast’s other large business is NBC Universal.  Results there were mixed in the quarter.  The NBC broadcast network performed well as did theme parks.  Cable networks were mixed and filmed entertainment took a big step lower against impossible comparisons from last year’s release of Jurassic World and Furious 7.  Theme parks are undoubtedly a growth business and NBC is enjoying a turnaround.

There are long-term challenges to TV networks so when valuing Comcast, we place a conservative valuation on NBC Universal and back into the implied valuation of the cable business.  Presently, that suggests, cable is being valued at about 7X EBITDA.  This strikes us as inexpensive for mid to uppers single digit growth in a 100% domestic business.  Furthermore, Comcast remains very strongly financially with debt to EBITDA at just 2X, well below peers.  This leaves the company well positioned to invest in its business, exactly what it has done to enable its current leadership position.

The one thing we worry most about at Comcast is that someday, maybe with the advent of 5G wireless, the network advantage that is driving much of cable’s resiliency and growth will dissipate.  We already hear noise on this front but do not think ti will have a meaningful impact for another several years.  While the window is open for Comcast to continue its steady growth, we see CMCSA shares as a core holding.

CMCSA is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CMCSA is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Despite a Wall of Worry, Comcast Continues to Perform

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Comcast (CMCSA) reported another good quarter, seemingly a habit for the company.  Against a lot of noise and negative headline regarding cord cutting, cord shaving, anti-cable regulation, and technological change, the company continues to execute superbly.

The latest quarterly results were issued almost simultaneously with the acquisition of DreamWorks Animation (DWA).  CMCSA paid a steep price for DWA but the acquisition is strategic more so than financial.  Furthermore, CMCSA has an enterprise value approaching $200 billion, making the expenditure of $3.8 billion a low-risk move.  Capturing DWA’s intellectual property (Shrek, How to Train Your Dragon, Kung Fu Panda) and relations hips in China offer upside to CMCSA’s TV networks, theme parks, and film studio.

Getting back to earnings, consolidated revenues grew 5.3% and operating cash flow rose 6.9%.  At the cable business, revenues were up 6.7% driven by 269,000 new customer relationships and a 4% increase in revenue per subscriber.  Broadband is the major driver with revenues up 7.6% and 438,000 new subscribers.  The much maligned cable TV business saw 3.9% revenue growth and 53,000 new subscribers.  You read that right.  Despite all the talk about cord cutting, CMCSA has been adding cable TV subscribers.  Heavy investment in the network and the X1 set top box and software is allowing CMCSA to gain market share, particularly from satellite.  Skinny bundles, which can hurt NBC Universal, provide a more balanced impact on the cable TV business.

An old adage on Wall Street is that bull markets climb a wall of worry.  This is less applicable to individual stocks but does still apply. CMCSA faces many worries but so far they are not impacting the company, which is thriving, rather than reeling.  We find the combination of steady, moderate growth in financial metrics, unusually strong balance street metrics, shareholder friendly capital allocation, smart strategic thinking, and excellent operational execution very attractive.  On a sum of the parts basis using peer comparisons, the shares belong in upper $60s.

CMCSA is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CMCSA is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.