Comcast (CMCSK) reported mixed results relative to consensus expectations but growth remains vibrant and the outlook is excellent. Financial results were good with mid-single digit revenue growth and modest margin expansion leading to high single digit growth in operating cash flow. There was modest disappointment with subscriber counts at cable but nothing outside the margin of error. NBC Universal continues to show a strong turnaround with a significant potential if the improved ratings at the NBC network hold through spring.
Comcast’s financial profile is superb and offers promise for significant boost to shareholder returns in early 2014. The company is ahead of schedule in reaching its targeted debt levels. This should mean a big boost to the share repurchase plan and dividend is coming early next year. There is also the possibility that Comcast increases its debt level modestly to further juice return of capital to shareholders. Management seems 100% committed to its debt targets but by any measure there is room for more debt given the stability of the financial model.
Management may be waiting on rumored industry consolidation in cable as the company has some capacity to add subscribers without violating government ownership limits. Scale truly matters in cable as Comcast has shown by outperforming the industry significantly over the past year. Industry pioneer John Malone is leading the charge for more industry consolidation, something that can benefit Comcast in two ways. First, it reveals the value in the cable business, which Comcast’s trading multiples arguably do not reflect. Second, participating in consolidation could allow Comcast to gain even more economies of scale and further improve the financial model.
A slight expansion in the multiple applied to Comcast’s cable business along with an industry average valuation for NBC Universal would lead to Comcast shares approaching $60. With business trends stable and financial strength unparalleled in the media industry, Comcast shares are worth owning.
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. CMCSK is a new long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.