Comcast (CMCSK) reported results right in line with Wall Street expectations for 3Q15.  Revenues grew 11% and Operating Cash Flow gained 8.4%.  CMCSK is really two entities, the core Comcast Cable business now operated under the Xfinity brand, and the entertainment businesses operated at NBC Universal.  NBCU consists of the NBC TV Network, cable TV networks, Universal theme parks, and the Universal Film and TV studio.  Both sides of CMCSK’s business performed well in 3Q but it was outstanding success in films and theme parks that led growth.

Investors are most interested in Xfinity, however, which makes sense given it represents 2/3rds of revenue and 75% of operating cash flow.  Thankfully, once again, despite lots of concerns about the cable business (net neutrality, cord cutting, cord shaving).  Revenue and EBITDA each grew 6.4% and while the company lost 48,000 subscribers, this was the best subscriber performance in a third quarter in 9 years!  Xfinity added 320,000 high speed internet customers and saw revenues from broadband grow by over 10%.  There is no denying that how consumers TV is changing and there is some risk to the TV side of the cable business but at Comcast, and the cable industry in general,  the changes are impacting fundamentals very slowly. Furthermore, Xfinity should not really be called a cable company anymore but rather a broadband company.

NBCU was led by a 64% gain in revenue at the film studio that translated to a gain of 150% in operating cash flow.  Minions, Fast and Furious, and Jurassic World led the way in a record breaking year for the studio.  Theme Parks saw 14% growth in revenue and operating cash flow, driven by the Harry Potter attractions in Orlando and Fast and Furious ride in Hollywood.  The TV networks, also facing challenges from declining sub growth and lower ratings due to Netflix and cord cutting, reported modest growth.  Once again, the story is likely one where sentiment toward the TV networks is a lot worse than the reality of the impact on the business in the near-term.

CMCSK shares are up about 8% this year despite the concerns about the changing TV business.  Since August, when ESPN lowered its growth forecast and media stocks fell a quick 20%, Comcast is down just 5%.  Northlake thinks this shows the strength of Comcast’s business and expects continued solid quarterly results to eventually get CMCSK shares moving higher again.  Trading at less than 8 times operating cash flow while producing high free cash flow that is being reinvested in the business and returned to shareholders through dividends and share repurchases, CMCSK continue to look attractive.  We maintain our target for CMCSK to trade in the $70s over the next 6 to 12 months.

 

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.