Northlake has been patient with Comcast over the past year as we disliked both the ultimately futile pursuit of 21^st Century Fox assets and the ultimately successful purchase of Sky.  We have stuck with Comcast due to management’s consistent execution in its operating businesses and our view that cord cutting concerns are overdone.  Comcast’s 4Q18 earnings support our patience as the company showed in line to better than expected results in each of its business units with accelerating growth in its cable business.  You read that correctly.  Revenue and EBITDA growth in 4Q18, at 5.2% and 7.3%, respectively, accelerated and is at its fastest rate in six years.

How is it possible that Comcast can be growing its cable business at a decent rate amid cord cutting?  First, the cord cutting phenomenon is much more severe for satellite TV (DirecTV and Dish) than for cable.  Over the past several quarters, total pay TV subscribers have consistently fallen almost -4% on a year over year basis.  However, as in 4Q18, Comcast subscriber losses have been at just under -2%.  Comcast’s X1 strategy is allowing the company’s pay TV business to outperform peers and manage for profitability as it focuses on controlling expenses.  This allows the company’s fast growing broadband business to drive the cable business – subscribers up 5% year over year, revenue up 10% as customers pay for speed.  Broadband is much higher margin, so overall Comcast’s cable business is able to grow moderately and expand margins – up 80 basis points in 2018 with a forecast for another 50 basis point improvement in 2019.  Northlake is not arguing with the threat to the pay TV business.  However, investor sentiment and the torrent of cord cutting articles paint a picture much bleaker than the financial reality.  We also believe the threat from wireless substitution or 5G Fixed Wireless Broadband are overdone as data caps on traditional wireless places are a fraction of consumption of Comcast’s broadband subscribers and 5G Fixed Wireless is an unproven technology at scale.

With the acquisition of Sky, Comcast now gets about half of its revenue away from cable.  NBC, film and TV production, cable networks, theme parks, Sky satellite in Europe each face their own threats from changing consumer TV habits.  For now, excellent day-to-day management is allowing these businesses to continue to produce steady growth.  We actually see greater risks here than cable, especially Sky, but once again the financial reality for the next few years is far better than investor sentiment.

The bottom line is we see Comcast executing well and continuing to offer above average growth in key financial measures of revenue, earnings and free cash flow.  Management showed its confidence in the outlook by raising the dividend 10%.  We are also confident and look for Comcast shares to grind higher over the next year.  In the low $40s, we would reconsider our bullish stance but that represents 15% upside from current trading levels.  With well below average financial variability, 15% is plenty when there are so many macro issues troubling the market.

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.