If I told you Comcast had more almost 3% more subscribers today than a year ago, I bet you would think I was crazy.  Well, that is the truth.  Yes, the company is losing video subscribers to cord cutting in favor of Netflix, Hulu or skinny streaming cable-like channel bundles.  But broadband is still growing – 260,000 new subscribers in 2Q18 – and the company is still adding commercial/business customers from small to mid to enterprise.  The bottom line is despite the dire headlines, Comcast’s broadband business is still strong.  Even better, the cable business is becoming more profitable and less capital intensive as the mix shifts from low margin, capital intense video – think set top boxes – to high margin broadband connectivity.  These trends look set to continue.  On its conference call this morning, Comcast noted that a typical household uses over 150GB of data and has 11 devices attached to the Wi-Fi router.  Unlimited wireless data plans and 5g can take some customers who would otherwise use cable broadband but the wireless networks are just not robust enough for the current data use case and the data usage continues to grow rapidly.  Furthermore, cable broadband capacity and speed can scale much more easily than wireless.

Comcast stock has underperformed this year for several reasons including skepticism on the long-term growth of the core cable business.  2Q18 results should provide relief on this front.  However, Comcast is still not in the clear with investors due to its now abandoned pursuit of assets being sold by 21^st Century Fox and its ongoing and likely successful attempt to purchase Sky.  We understand the strategic rationale for both these transactions.  We just do not see either of them as the best course of action for Comcast shareholders over the next year or two. This is especially the case when the core cable business is trading at all-time low valuations and the company’s balance sheet and free cash flow are extremely strong.  The best thing for current Comcast shareholders is for the company to buy back its stock and raises it dividend.  Again, we understand that management thinks years ahead, while we send monthly updates and quarterly letters to clients.

All that said, we are sticking with Comcast as a long in the Northlake portfolio.  We think investors have come to grips with the ill-advised likely acquisition of Sky.  Improved sentiment toward the cable business should allow the shares to recover to around $40 over the balance of the 2018, still 5-10% below where the shares peaked prior to the Fox and Sky news.  Should our forecast prove accurate, we will reevaluate our long-standing bullish outlook for Comcast shares with more insight into trends in the core cable business, the Sky transaction, and competitive challenges at NBC Universal’s cable and broadcast TV businesses.

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.