Media Talk

Steady As She Goes at Blue Chip Comcast

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.

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