Comcast (CMCSA) reported a mostly in-line quarter that is somewhat reassuring after a tough stretch for the stock and its cable peers.  Potentially improving sentiment for the shares, the company reported new broadband subscribers in-line with estimates that management had lowered multiple times over the prior four months.  Furthermore, there were no further cautionary comments to lower broadband subscriber guidance in early 2022.

Stock Reaction:  Initially the shares traded sharply lower in what has been a common reaction at each recent earnings report.  However, the shares rebounded to just a small loss that was no worse than the market by the end of the day.  The shares flipped nicely positive in Friday’s big market gain to finish above the pre-earnings report level.  We take this action as a good sign that expectations have been effectively reset (lowered), something that could clear the way for improved stock performance.

Earnings Analysis:  Comcast’s financial performance is dominated by its cable business which is now driven by broadband.  Traditional cable TV is shrinking and has operated at a low profit margin for several years.  Losing cable TV subscribers has little impact on the company.  In fact, growth in mobile phone subscribers is now more important and profitable with the new bundle being broadband plus wireless phone.  This backdrop keeps churn low on broadband and allows the company to grow cash flow from the cable business at least at a mid-single-digit rate. 

Comcast’s other businesses are in entertainment.  The Universal theme parks are performing very well and expanding internationally along with new investments domestically.  The company’s traditional linear TV businesses in the US and Europe continue to face challenges.  The businesses produce cash flow but are in secular decline.  In response, like its other media peers, Comcast is investing heavily in streaming.  With its earnings announcement, management announcement a doubling of the investment (losses) at Peacock over the next two years.  Peacock has gotten off to a slow start although management’s defense of the strategy on the earnings call seemed to be grudgingly accepted.  We believe part of the initial plunge in the shares following the report was due to the increased Peacock losses. As noted, the rebound in the shares is an encouraging sign that the expectation reset is complete.

Target Price: Last quarter, our update noted that challenges facing Comcast shares had arrived ahead of schedule.  This quarter showed no real letup in the challenges but investors appear to have adjusted to the new reality.  Importantly, it is clear that Comcast can continue to generate solid growth in cash flow that can drive dividends and share repurchases.  Buybacks are doubling this year, and the capacity to maintain the strong balance sheet and buyback even more stock is quite evident.  As long as broadband subscriber growth has reached a nadir, this should put a floor under the shares and allow for a modest rebound.  We plan to hold Comcast shares but have reset our target price to $56 from the low $60s.  Improved broadband growth later in 2022 would bring the $60s back in play as this would indicate that despite growing competition from telcos offering fiber and fixed wireless broadband, Comcast’s long-term cash flow profile is secure.

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.