Archive for category: Comcast/Cable TV

Comcast (CMCSA) remains a unique investment, winning on all sides of the pandemic-impacted economy.  Broadband continues to have a tailwind as the value and necessity of a high-speed internet connection has been enhanced, likely permanently in our view.  NBC Universal is a cyclical business and just at the start of its recovery in theme parks, TV advertising, and movies.  Financial performance is strong with the balance sheet repaired after earlier acquisitions and focus shifting to share buybacks and continuing dividend growth.  With strong execution by a stable and experienced management team, CMCSA shares offer relatively low volatility and double-digit upside potential.  We maintain our target price of $64 based on slightly higher 2022 estimates.

The second quarter report offered a few fresh insights.  First, broadband demand remains good but the big upside in net adds is coming from lower churn this year.  We think this shows how the pandemic has raised the importance of a broadband connection.  It is possible that lower moves and government programs are providing a temporary boost.  Second, Peacock will be rolled out in Europe in the markets where Sky is active (UK, Germany, Italy).  Peacock sign-ups and usage are getting a boost in the U.S. from the Olympics.  Management has not committed for a massive investment cycle at Peacock.  This could be a risk given how much competitors like Netflix, Warner Brothers Discovery, Amazon and others are spending.  Comcast sees Peacock as complementary rather than a full substitute to its linear networks.  This means more focus on advertising and less on paid subscribers.  Third, Xfinity Mobile has achieved profitability sooner than expected.  The swing could be $500 million or more in the next few years, meaningful even at Comcast’s massive scale ($34 billion in EBITDA in 2021). Mobile may also be helping broadband thru double play bundles and lower churn.  Finally, theme parks are recovering ahead of schedule and are at 2019 profit levels despite attendance still barely over 70% of pre-pandemic levels.  The park in Beijing will open soon and at first that will pressure profits.  It adds a nice growth opportunity beginning in 2022.

Comcast’s balance sheet carries a lot less debt relative to cash flow than other cable and entertainment companies.  The company is now buying back stock but there will be tens of billions of excess capacity if the company maintains current leverage as EBITDA grows over the next several years.  The positive is a big boost in the buyback could be coming.  The negative is investors will still worry that Comcast is looking for a big acquisition to bolster Peacock and protect NBC and its cable networks.

We also are continuing to monitor increased competition in broadband from AT&T, T Mobile, and Verizon as they build out fiber and 5G fixed wireless.  The current administration also is likely to keep the regulatory pressure on.  Comcast shares have done well but always seem to have a series of risks that investors can’t let go.  At one time, we were worried these risks would derail the shares in 2021.  The timing has now shifted to 2022.  For the next few quarters, this leaves a window for continued gains in CMCSA shares, especially if the company provides a big boost to its buyback in 4Q21 when the next capital allocation update is due.

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. 

In a tough year for media and entertainment stocks, Comcast (CMCSK) has been a good performer rising 11% through October, a bit ahead of the S&P 500. As the just reported third quarter revealed, performance would be even better if not for the headwinds that have buffeted media and entertainment stocks. The good news is that the headwinds for the group and specific to Comcast are likely to diminish in the months ahead. Comcast remains one of the most attractive large cap stocks Northlake follows with upside of 20-30% looking out one year.
In the quarter ending September 30, 2014, Comcast reported results right inline or a bit better than analyst estimates. Overall, revenues grew 4%, operating cash flow rose 7%, free cash flow rose 27%, and EPS gained 12%. This is the math that works for Comcast shareholders as the free cash flow is used to sustain the company’s dominant competitive position through (1) investment in the business or acquisitions, (2) payment of a healthy dividend, and (3) aggressively repurchasing shares. The math gets even better after Comcast’s acquisition of Time Warner Cable closes next spring.

The acquisition of Time Warner Cable is one of headwinds Comcast and the media and entertainment stocks are facing this year. The regulatory review of the merger is closely related to net neutrality debate, which in turn is tied to the fears about the competitive threat and business model interruption surrounding emerging over-the-top (OTT) video services. Over the past few weeks, investors began to fear that the government might block the merger as part of increased regulatory oversight of the media and entertainment industries. This was evident as the spread on the between the value of the merger and Time Warner Cable’s stock price rose form 5% to 10%. However, late last week the spread narrowed back to under 8% after the FCC floated a trial balloon.

I believe that the trial balloon floated last week by the FCC is the first concrete step toward resolving these issues in a way that should not greatly impact Comcast’s long-term growth and releases the upside related to the acquisition of Time Warner Cable. It appears the FCC is looking at a compromise solution on net neutrality where the interconnection between Comcast and other internet service providers (ISPs) and large websites or web services would be under FCC jurisdiction but the relationship between ISPs and their subscribers (that would be you and me) would remain unregulated.

This compromise is important to Comcast because it also signals that approval of the merger with Time Warner Cable is likely. The FCC can use the new net neutrality rules and apply other constraints when it approves the Comcast-Time Warner Cable merger including prohibiting the new larger company from charging websites and service providers for interconnection. Applying conditions to Comcast post-merger also is a good signal to the rest of the industry as to what the FCC is looking to accomplish as it applies regulation in the future. More regulation is never welcome o Wall Street but this compromise probably works for all players and will ease investor and uncertainty. Comcast can thrive under this regulatory framework, which is why I think another quarter of solid earnings can allow the shares to continue to outperform.

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 (CMCSK) reported another excellent quarter and indicated the outlook for 2014, and even 2015, is strong. Showing confidence in its business strategy, execution, and growth potential, the company increased the dividend by 15% and expanded its share buyback program by $3 billion. The headline financial metrics for the fourth quarter were impressive: revenue +5.8%, operating cash flow +8.3%, free cash flow +6.9%, and EPS +28.0%.

Importantly, both sides of Comcast, cable and content contributed to the good results. In fact, the NBC Universal business (TV networks, theme parks, film and TV studios) grew faster than cable this quarter and the turnaround the street has been expecting appears to be ahead of schedule. In hindsight the two-step takeover on NBCU was well-timed and completed at a very attractive price with a superb financing strategy. Cable alone drives Northlake’s target of mid-$60s for CMCSK shares. Moving NCU’s implied valuation closer to peer content companies like 21st Century Fox and Disney could add a few more dollars to CMCSK upside.

On the cable side, CMCSK is using its scale to improve customer service, provide advanced programming navigation and choices, rapidly grow business services, and dominate the broadband business. Despite lots of worries about the future of cable TV, CMCSK seems to have built a defensive moat around the business leading to modest growth. With broadband and business services growing much faster, the overall cable business can sustain mid-to-upper single digit growth.

CMCSK also is somewhat hedged against the changes impacting the TV business by owning both distribution and content. In particular, the broadband business will benefit from any services designed to shift TV viewing to “over the top” or internet-based. In addition, OTT business models seem to offer incremental upside to NBCU as demand for quality content from new distributors would increase.
Overall, CMCSK seems like an ideal megacap company for the current economic and market environment. Consistent moderate growth in revenue and stable margins and capital spending is driving above average free cash flow growth which CMCSK is using to reward shareholders with rising dividends and share buybacks. The balance sheet remains very strong with capacity to further increase shareholder returns through consolidation opportunities in cable or content. Should those opportunities fail to materialize, substantial additional share buybacks and dividends are likely. Using a historically conservative 8X multiple for cable and an industry average 10X multiple NBCU, Comcast can trade to the mid-$60s, supported by significant share buybacks and a dividend yield approaching 2%.

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.

Despite merger and acquisition rumors popping up all around the cable and satellite industry, Comcast CMCSK) shares have not moved higher. This makes sense since Comcast is by far the biggest company in U.S. pay TV industry with 25 million subscribers. Charter Communications, now 25% owned by cable industry pioneer John Malone’s Liberty Media (LMCA) has just 4 million subscribers. Charter is hoping to buy Time Warner Cable, the second largest cable company, with 10 million subscribers. The combination of Malone’s return and his bullish outlook for cable broadband and the possibility of acquisitions at premium prices suggest the value of a cable subscriber has moved up considerably. While Comcast will not be sold and is unlikely to buy other cable systems, all the activity in the industry does give a boost to the value of its subscribers and, in turn, its stock price. Add in early signs of turnaround at Comcast-owned NBC, steady growth in NBC Universal cable networks and theme parks, continued mid-single digit growth in Comcast’s core cable TV and broadband business and Comcast shares look like they have at least 20% upside.
Comcast generates about 80% of its operating cash flow from cable and 20% from NBC Universal. Other pure play cable stocks are trading at 8-9 times EBITDA in the current rumor-friendly environment. Assets similar to NBC Universal’s stable of cable TV networks and theme parks trade at more than 10 times EBITDA. However, at $38, Comcast shares trade at less than 6.5 times EBITDA. Again, Comcast assets should not be valued at acquisition inflated premiums but somewhat higher valuations seem warranted. At a blended multiple of 8 times 2014 EBITDA, Comcast would trade at $60, a full 50% above the price Northlake clients bought in June. At 7 times EBITDA, Comcast would trade just over $50, still 30% above Northlake’s recent purchase.
One final support for higher prices for Comcast shares is the company’s excellent balance sheet and free cash flow. Comcast is projected to end 2013 with debt at just a little over 2 times EBITDA. This is a very healthy balance sheet indicative of investment grade ratings. Free cash flow should be comfortably over $3 per share in 2013, giving the shares a free cash flow yield of over 8%. Comcast is using its free cash flow to aggressive buy its own shares and pay a healthy dividend. Shares outstanding are falling by over 2% per year providing further support for forward valuation of Comcast shares. Modest dividend increases can also be expected each year on top of the present current yield of almost 2%.
CMCSK is widely owned by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Regulatory filings can be found at www.sec.gov. CMCSK is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focusing on media, entertainment, leisure, communications, and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the Entermedia Funds.

Comcast reported better than expected 1Q09 results pretty much across the board. I completely missed this as I had expected this to be the final quarter of sluggish growth with estimates coming down again. I underestimated Comcast’s excellent operating management and favorable seasonal trends.
It was clear after Time Warner Cable (TWC) reported yesterday that big cable companies had a good quarter. Competition with telcos is fierce but rational and each side still is able to find growth drivers without severely damaging industry economics.
Comcast reported 5% revenue growth and 8% EBITDA growth, above my expectation for mid-single digit growth. Full year estimates may rise slightly though management did provide a note of caution with a statement that trends in March and April weakened vs. January and February.
Subscriber metrics were better than expected. Basic sub losses were modest, especially given big TV gains for the telcos in 1Q. High speed internet was much better than expected. Only telephony fell short although revenue growth for voice was over 30%.
Profitability is getting a boost as internet and voice economies of scale kick in across a a largely sunk network costs. Margins exceeded expectations, rising 120 basis points to a very healthy 40.9%.
The best news is continued growth in free cash flow driven by falling capital spending. Free cash flow grew 95% to $1.37 billion as overall spending dropped $200 million. As a percent of revenue, capital spending was just 13.1%, down form 17.1% in 2008 and 19.6% in 2007. Comcast plans to sue 2009 free cash flow to pay down debt given the unusual economic and credit market environment. However, the company is already below leverage target so assuming the economy is stable later this year a very large share repurchase is looming.
2Q faces seasonal headwinds along with the concern regarding slowing trends in March and April. This could limit further upside in Comcast shares following the strong run yesterday and this morning. However, with a big mea culpa from my blown preview of 1Q09, if Comcast can navigate the current environment and sustain mid single digit growth, the long-term value is the shares is higher. The key is maintaining free cash flow near 1Q levels.
I am not a buyer after the run but Comcast is back on my radar screen as a buy on weakness.