Archive for category: Comcast

Comcast continued its long string of good quarterly earnings reports with the highlight being the best cable TV subscriber growth in nine years.  Yes, for all the worry about cord cutting, Comcast added subscribers in 2015.  And growth in broadband subscribers, where Comcast and the cable industry maintain dominance with the fastest network continued unabated.

Comcast grew revenues and EBITDA in mid to upper single digits and free cash flow in the double digits in 2015.  We see similar growth in 2016 as the company has invested wisely in its network and TV business.  Fastest internet speeds remains a strong draw for cable and enables moderate prices increases for broadband.   Comcast’s X1 box is now being very widely deployed and the software interface is best in class.  Comcast has also invested heavily in program rights allowing subscribers to access full currents seasons of almost all major TV shows.  Additionally, Comcast’s apps enable easy viewing in any location or any mobile device of live, on demand, or recorded programming.

The cable industry, led by Comcast, is in pretty good shape despite all the concerns about Netflix and cord cutting.  Satellite companies do not offer broadband technology and while AT&T purchased DirecTV, so far subscriber gains are just being passed around among the two companies.  Cable also benefits from being a domestic only industry when most of issues plaguing Wall Street emanate form overseas.

Comcast does own some cable networks in its NBC Universal division.  These networks comprise only about 15% of total operating cash flow, however.  The rest of NBCU is made up high performing theme parks, the most successful film studio in 2015, and the NBC Television Network which is staging a nice turnaround.

Backing out NBCU at a depressed multiple of 8X its cash flow leaves the cable business that dominates Comcast trading for 6.5X operating cash flow.  This is way too cheap for a business growing steadily in the mid upper to upper single digits and throwing off enormous free cash flow.  Comcast has used its cash flow wisely leaving it with a very strong balance sheet, another positive when global markets are nervous.  We see Comcast trading up the mid-$60s, 20% of recent prices, as investors grow to appreciate its attributes.

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.

 

It is back to business as usual at Comcast (CMCSK) and investors have no reason to not like that.  The now scuttled acquisition of Time Warner Cable is definitely a lost opportunity but Comcast retains many strengths.  We always viewed the acquisition as a “nice to have” as opposed to a “need to have.”  Comcast’s model of mid single digit revenue growth, slight margin expansion, and stable capital spending intensity leads to 15% plus growth in free cash flow.  On top of an exceptionally strong balance sheet, management retains many options to drive shareholder value.  We expect steady dividend growth and larger share buybacks to dominate the capital allocation debate through 2016.  At that point, larger acquisition attempts might be on the table under a new administration and FCC.

Often overlooked when analyzing Comcast is the company’s ownership of NBC Universal.  This collection of TV networks, theme parks, and move and TV production studios had a great quarter.  Certainly, NBCU deserves to be valued similarly to its peers such as Time Warner, 21^st Century Fox, and other TV network owners.  Putting an industry average 10X EBITDA multiple on NBCU leaves the core Comcast cable business trading at 10-15% discount to its peers.  Peers that are smaller, less profitable, more financially leveraged, and in most case growing more slowly.

Even without the benefit of using what seems to be a lot of excess free cash flow, Comcast shares can rise to themed-$60s just by closing the valuation gap vs. other cable and telecommunication companies.  Using excess financial capacity on acquisitions or share repurchases provides more upside particularly looking into 2017.

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’s (CMCSK) pending purchase of Time Warner Cable (TWC) improves upon an already positive story for CMCSK shares. Assuming approval effective 1/1/2015, analysts are estimating 5-10% accretion in free cash flow per share vs. Comcast continuing as a standalone entity. Accretion emanates from synergies in operating expenses and capital expenditures, estimated by management at $1.5 billion and $400 million once fully implemented over a 2 year period. Analysts are being a little more conservative in their forecasts assuming a three year implementation period. Management is not assuming any synergies on revenue. This strikes me as conservative, especially for the already rapidly growing business services at each company. With cable lines in 23 of the largest 25 markets in the U.S., the enlarged Comcast seems particularly well-positioned to accelerate focus and growth in business services.

My experience with Comcast management and large mergers generally is that management synergy estimates are usually conservative in terms of scope and time to achieve. Within the cable industry, synergies are relatively straightforward as the companies do not compete head-to-head so savings are mostly in overhead and scale purchasing economics.

Presently, combining the companies for 2014 and assuming no synergies, free cash flow per share is projected around $2.85 based on analyst estimates. With CMCSA/CMCSK shares trading at an average price of about $53 that puts the multiple around 18.5x and the free cash flow yield near 5.5%. Assuming a 1/1/15 deal close, analyst estimates (admittedly with a wide variation) show free cash flow growth of 16% in 2015, 20% in 2016, and 23% in 2017. Growth accelerates as synergies and share repurchases kick in.

Given this growth outlook, I think CMCSK shares can sustain their current free cash multiple, equating to a price target of $65 on 2015 estimates. This provides about 20% upside, plenty to justify owning CMCSK shares.

CMCSK shares traded a little lower on the deal announcement as arbitrageurs began positioning long TWC/short CMCSK. Given that I found CMCSK undervalued even before the merger announcement, I think downside is limited even if the government rejects the merger or imposes even stricter conditions than assumed. I think approval is likely with an extension of the consent decree CMCSK already operates under from its NBC Universal acquisition. The consent decree runs through 2017 and I would not be surprised to see it extended for a few years on the enlarged company.

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 regulatory filings can be found at www.sec.gov. CMCSK and TWC are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

One of my most important reactions to breaking news or rumors is to get my thoughts down on paper. This allows me to organize my ideas, determine questions and get a handle on how the stock market may initially react to the news.
I’ve written recently about how mergers and acquisitions have returned to the forefront of media investors’ minds. I have also noted that I thought there would be more M&A activity than most observers think as long as credit markets remain open and stable. Certainly, the rumored deal for Comcast Corp. to buy NBC Universal Inc. supports the view that media M&A is back.
My closest confidante in media stocks sent me an e-mail almost as soon as Sharon Waxman of The Wrap broke the story that Comcast had a deal to buy NBC Universal. Comcast denied it had a deal but clearly left the door open to the possibility that they were in negotiations.
Anyway, here is my “thinking out loud response” to my friend’s e-mail:
Comcast will surely trade off of this. As will Time Warner Cable Inc. and Cablevision Systems Corp. Time Warner Inc. will likely trade up, and it might give a boost to Walt Disney Co., Viacom Inc. and News Corp., depending on valuation. I’d have to think a deal this size is good for the group multiples. Discovery Communications Inc. and Scripps Networks Interactive Inc. will clearly be viewed as in play now. Of course, no one has to do anything to get bigger to battle Comcast/NBC Universal, because the synergies are horizontal rather than vertical. In other words, Comcast would be folding in assets in areas where it only has minimal operations, thus the competitive landscape changes less than might be perceived.
The question I guess is whether Comcast controlling this much content alters the landscape in a digital world. On the one hand, it changes little, since Comcast has limited exposure to content now. Just a different owner for one of the majors. On the other hand, does the marriage of content and distribution finally make compelling sense due to digital distribution? I really don’t know.
Back in Telecommunications Inc. days when you could still build value via launching new analog cable channels, distribution could create value out of content. Then you had Time Warner even before AOL LLC, which is basically what Comcast/NBC Universal is except for Comcast has a broadcast network and local TV stations. The marriage of cable and content at pre-AOL/Time Warner never produced anything special.
What about regulations? Didn’t there used to be regulation preventing cable systems and TV stations from being owned in local markets? [Edit: I have since learned that these expired a few years ago]. I assume Comcast would not be far along in a deal for NBC Universal if that were a problem, as there is no one on which to unload the broadcast assets unless allowing one entity to own two broadcast nets were allowed.
More importantly, given the market position of this entity, regulators, especially Obama regulators, are going to be all over it as far as taking advantage of whatever digital plans they will have. I see that as a big negative for this deal from Comcast’s perspective.
Can Comcast borrow $35 billion? Giving General Electric a huge piece of Comcast equity creates future supply as GE will have an out, a la Vivendi. You may as well go all in and leverage up, hoping that if the deal works, the deleveraging provides the bulk of the returns to common shareholders.
Those are just some first thoughts that popped into my head. They could be way off base, but I like to think aloud when stuff like this happens.
Reading that over in the light of morning and after scanning some press reports on the rumors, I do not have much to add. The only thing that comes to mind is that Comcast’s On Demand Online initiative could be at odds with Hulu, which is partially owned by NBC Universal and has been a major success. This is the sort of conflict that will raise serious issues with regulators should Comcast take ownership of or a major stake in NBC Universal.
Disclosure: Discovery Communications is widely held by clients of Northlake Capital Management LLC, including in Steve Birenberg’s personal accounts.

Partially driven by tax considerations, I sold Northlake’s entire position in Comcast yesterday. I used the proceeds to purchase a full position in News Corporation. I completed this trade across Northlake’s entire base of separately managed client accounts and in my two main personal accounts.
The Comcast long proved to be disastrous. My analysis of the company’s fundamentals and the stock market’s likely reaction proved wrong. I bought the position last July at more that $27. It was a 3% for most accounts position so it cost clients about 1% relative to the S&P 500 benchmark. Ouch. I’ve chronicled repeatedly why I was long Comcast and why I think the stock is undervalued at these prices. I still believe the shares are undervalued but barring a dramatic action by management I don’t see the potential for a significant rebound (>20%) in the next six months. Current fundamentals aren’t nearly as bad as the stock price implies but they are weak relative to Wall Street expectations and risk remains that there is one more disappointment in operating metric or capital spending guidance.
On the other hand, fundamentals at News Corporation are very positive. 1Q08 results are already in the books and strongly suggested that estimates are too low. When Rupert Murdoch refused to raise guidance due to concerns about the economy, the shares sold off as the implication is that estimates for the remainder of the year are too high. I think this reasoning will be proved wrong and we will find out within the next six weeks when News Corporation presents at a major sell side conference and then reports its 2Q08 results.
Simply put, I think News Corporation is similarly undervalued to Comcast but it has positive operating momentum and a recognizable catalyst. Add in the tax loss benefit against gains I’ve realized this year in my market cap and style rotation strategies and on position trimming in Apple and Central European Media Enterprises and the swap from Comcast to News Corporation makes sense.
I’d like to reiterate that I think Comcast remains cheap and oversold at current prices. My investment strategy limits the number of long positions I can maintain at any point in time. Something had to be sacrificed. No doubt it will prove to be a sacrifice to the trading deities as well so you can hold the emails noting that I threw in the towel at the low that are sure to come my way when Comcast is trading in the low $20s.