After writing positively about Comcast (CMCSA) for two years on Media Talk and in my contributions for theStreet.com, I finally decided it was time to buy the stock for Northlake clients. The main reason I had not bought Comcast previously was that I was very satisfied with the current portfolio of stocks held by clients. Northlake’s equity management strategy imposes a strict discipline on individual stock holdings by limiting holdings to just 6 to 8 companies. So it wasn’t that I did not think Comcast was a good investment but rather that it didn’t make my top 8. With the shares up just 2% this year against a gain of 10% for the S&P 500, I think enough value has been created that Comcast now makes the top 8. Consequently, on Friday morning I purchased Comcast across the entire Northlake client base.
The investment thesis for Comcast is that the company will sustain growth of 12-15% for several more years in revenue and earnings on the back of its triple offering of cable TV, high speed internet, and telephony to consumers and businesses. Furthermore, Comcast will maintain this growth without any significant increases in capital spending beyond the equipment at customers’ premises that is required to activate the services. This should lead to growing free cash flow enhancing an already extremely strong financial position. Comcast will use its growing financial strength to enhance shareholder value through acquisitions, share buybacks, initiation of a meaningful annual dividend, and capital investment to protect its competitive position.
The shares are presently trading below their recent average multiple of operating cash flow despite this excellent outlook. As Comcast meets its financial targets over the next few quarters, investor concern about competition from Verizon and AT&T should moderate leading to an expansion in Comcast’s valuation at the same time that growth is above street expectations. This is usually a recipe for big gains in the stock price….

I am very confident in the path to significantly higher stock prices of $35-40. The reason for my confidence is two fold. First, Comcast shares went through a similar slump in 2005 before exploding to a gain of 80% in 2006. In 2005, there were the same worries about competition as well as concerns whether Comcast would rollout the triple play in a timely fashion. Throughout 2006 and so far in 2007, subscriber growth and gains in revenue and cash flow have put the initial worries to bed. Second, Cablevision, another major cable company which provides service in the New York City metropolitan area, is about two years ahead of Comcast in rolling out triple play services. Cable TV, high speed internet, and cable telephony are the same product everywhere – same technology, same marketing, same pricing. Comcast is expanding the reach of its triple play services across the country dramatically expanding its potential customer base. If you plot Cablevision’s customer growth into Comcast’s current profile, you can see where Comcast is headed in terms of subscriber and financial performance over the next two years. The outlook is very bright.
I’ll leave the explanation of Comcast’s attractiveness there for now rather than bore you with details and numbers. If you want to know more, here is a link to an archive of my postings on Comcast and the cable industry that have appeared on Media Talk.