Comcast reported solid 4Q19 results with strength in the cable business offset by a modest shortfall at NBC Universal’s broadcast and cable TV networks, theme parks, and film studio.  As often seems to be the case over the past year, Comcast’s conference call snatched defeat from the jaws of victory when the company discussed specific details of the quarter and provided guidance commentary looking ahead.  This quarter investor worries center on weaker than expected guidance for cable margin expansion in 2020, lack of affiliate growth for cable networks due to cord cutting, and investment spending at Sky.

At Northlake, we are not traders.  Instead we look at the big picture of company fundamentals against current valuation for the shares.  We have held steady at Comcast since our initial purchases in mid-2013 and been nicely rewarded with the shares up 140% since then.  The S&P 500 is up about 100% in the same time frame.  Presently, Comcast’s investment thesis is complex.  On the one hand, the cable business is in excellent shape.  Led by still robust growth in broadband subscribers (up 5% from a year ago), margins are expanding, capital spending is falling, and free cash flow is rising.  The company is losing cable TV subscribers (down over 3% in the past year) but still gaining customers overall thanks to broadband.  Furthermore, so far cord cutters tend be less profitable customers and when they do cut the cord they usually keep broadband and pay a higher price for it.  The tradeoff works for Comcast financially speaking.  Northlake remains bullish on Comcast’s cable business.

Where we have concern is on the future of the company’s cable and broadcast TV networks businesses and the recently acquired Sky.  Cable and broadcast TV make up about 20% of Comcast on a consolidated basis.  Sky represents another 17%.  TV networks are a loser from the cord cutting that is positive for Comcast Cable.  Comcast is addressing the transition to streaming by launching Peacock, an ad supported streaming service featuring the company’s massive trove of content generated by NBC and the Universal film and TV studio.  Northlake has a favorable view of Peacock though we question whether it can scale to offset cord cutting.  Sky has performed pretty well since Comcast acquired it a year ago.  The strategic thinking is that to compete successful in TV requites global scale.  Sky’s satellite TV subscribers in the UK, Italy, Germany, and other European markets give Comcast an easy entry to take its NBC Universal and Sky content businesses global.  Peacock seems built to take advantage of Sky’s international reach.  However, Sky itself has parallels to the rapidly declining satellite TV businesses at Dish and DirecTV.  Northlake sees Sky in a better light than most investors but concerns about Sky’s future and the large, debt financed investment Comcast made to purchase it are a headwind for the shares.

2020 could be a transitional year for Comcast as the story at cable is well understood and faces a slightly lower growth rate as the company absorbs a new round of programming cost inflation.  Nonetheless, we think very highly of Comcast management.  The company has had good success on an operational level and balances its capital allocation (dividends and buybacks) carefully with its investments to sustain growth.  In conjunction with the 4Q19 earnings release, Comcast raised its dividend by 10%.

Ultimately, we think the success in Comcast’s cable business wins out.  If we value Comcast between pure play cable and entertainment companies, the stock offers upside into the low $50s.  Along with a 2% dividend yield, the shares have upside of 15% looking out a year.  By the end of 2020, Comcast will have paid off the debt incurred to acquire Sky and share repurchases should resume.  This also supports our valuation calculation and provides a catalyst for the shares later in 2020.

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.