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January 28, 2014

Comcast Continues to Shine

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.

Posted by Steve Birenberg at January 28, 2014 09:15 AM in Comcast/Cable TV