Comcast’s 1Q20 earnings report and conference call exposed sharp differences of how the COVID crisis is impacting the company’s three business segments.  Already positive trends in the core cable business are getting a boost.  NBC Universal and Sky, however, are in the direct path of the virus with little visibility for the pace or timing of a recovery.  All three of Comcast’s businesses were already facing secular challenges that may now accelerate as the economic shutdown seems likely to create long-term impacts even assuming things get back to normal over the next six-to-twelve months.

All of this makes Comcast a difficult stock to analyze.  We have stuck with Comcast thanks to a strong management team and excellent free cash flow.  Since we expect the virus and economic shutdown to ease over time, we are sticking with the stock.  The story has become more complicated, more so than many other Northlake favorites.  Previously, we thought Comcast shares could trade to the low $50s late in 2020.  Like all of Northlake’s individual stock holdings, the payoff has also been pushed out.  Unlike some other stocks, we think our target needs to be lowered as secular challenges at NBC Universal and Sky like have accelerated more than the upside in the cable business thanks to the transition from cable to broadband.

A quick look at the company’s business in the time of COVID:

Comcast Cable is benefitting from a surge in broadband subscribers and more people paying for faster speeds.  Cord cutting is accelerating on the TV side but this helps profit margins as delivering cable TV is not very profitable due to high customer service costs and programming expenses.  Profit margins are rising as Comcast Cable becomes Comcast Broadband.  Free cash flow is improving as spending on customer premise equipment is falling and the network is proving extremely robust.

NBC Universal is in the direct path of COVID and the economic shutdown.  Theme parks are closed.  Movie theaters are closed.  TV advertising is very weak as consumers are not out spending money.  There was already a shift underway toward streaming that was a headwind for the company’s cable and broadcast TV networks.  Stay at home seems likely to accelerate the transition toward streaming hurting advertising and affiliate fees.

Sky is sort of like DirecTV with its main operations in the UK.  Over the years, Sky has led is customer acquisition and retention strategy with sports.  With major UK and European sports shut down, the company is in a difficult spot.  We expect sports to return but Sky faces similar secular headwinds from streaming that produces a leveraged economic impact as subscriber number decline.

Until we get a better feel for the rebound potential at NBC Universal’s theme parks, film and TV studio, cable and broadcast networks, and Sky’s sports-driven satellite TV subscriber base, we are unable to precisely calculate a price target.  We do think it is at least 20% above current trading levels, which thanks to the company’s strong management and financial profile, is enough for Northlake to continue holding Comcast.

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.