Comcast (CMCSK) reported another good quarter with mid single digit growth in revenue and operating cash flow and double digit gains in free cash flow.  Leaving aside all the noise around net neutrality regulation and the regulatory review of the Comcast-Time Warner Cable merger, CMCSK is executing very well on a consistent basis.  Investors have noticed as the stock has moved up consistently despite investors being fearful of the FCC’s new regulatory scheme and the arbitrage spread between Comcast and Time Warner suggesting the deal will be blocked.  Or maybe the fact that CMCSK shares continue to perform well means that investors are not worried about the new net neutrality regulations and do not see a lot of upside in the merger from synergies.

We are not trying to be flippant here.  Rather, we make the point that CMCSK is compelling investment under any circumstance.  There are few megacap companies able to consistently grow in the mid-signal digits with double digit free cash flow gains.  CMCSK management has proven it will take the free cash flow and give it back to shareholders in the form of dividends and share buybacks, while at the same time investing heavily in the business.  Comcast gets a lot of bad press for customer service snafus but the reality is that the company has upgraded its network, offers the best user interface, via its X1 set top box, and has the best video on demand platform of any multichannel service provider.  Customers are noticing as the company has actually added cable TV subscribers in this era dominated by cord cutting.  Broadband market share continues to rise and even with very limited price increases average revenue per customer is growing as consumers opt for higher speeds and upgrade to the X1 platform.

We value CMCSK on a sum of the parts basis using EBITDA multiples.  Valuing cable at 7x and the much improved NBC Universal at 10x would put the parts in line with peers and drive the shares to the mid-$60s.  Approval of the Time Warner Cable merger  would add a couple of dollars to the target as would either a successful legal challenge to the new net neutrality regulations or clear precedent that the FCC truly will forbear from rate regulation or unbundling of wired and wireless broadband networks.  Given strong operating and shareholder friendly management, we are willing to be on further upside in CMCSK.

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 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 focused on media, communications, leisure, and related technologies.  Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s investment management company.