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.