Comcast (CMCSA) still has to convince us and a lot of investors of the wisdom of its acquisition of Sky Plc, Europe’s largest satellite TV provider.  Fortunately, the company’s domestic cable business and NBC Universal content operations are performing well giving the company some breathing room.  Management can point to a strong record on acquisitions that have worked financially and strategically, including major diversification moves akin to the takeover of Sky.  We remain moderately skeptical, however, given the premium price paid for Sky, almost 2X current valuation of CMCSA shares on an EBITDA basis, and the fact the company is using most of its balance sheet capacity to finance the transaction.  Sky is less than 20% of Comcast so we are willing to trust management.  For now.

Looking back at the quarter, despite all the press and hand wringing about cord cutting, Comcast reported Adjust EBITDA growth of almost 8%in its cable business, the highest growth rate in six years.  Cash flow grew even stronger as the company continues to wind down a period of heavy investment in its cable network.  You may hate your cable company but it is continually pumping billions into its broadband network to increase the speed and reliability of your internet and cable TV.  Cord cutting hurts but the company is getting better at keeping customers in bundles as it rolls out its own skinny TV packages and demand for the industry’s leading broadband internet packages remains strong.

NBC Universal, which should get a boost from selling its content to Sky, saw broad based growth across its portfolio of cable and broadcast TV networks.  Film held back results against a tough comparison to a year ago.  The movie business is naturally lumpy depending on the timing of releases.

Prior to Sky, Comcast has the best balance sheet in media, leveraged at just 2X.  Sky will take that to 3.5X.  We would have preferred more dividends and share repurchases and a lower leverage level, given the suddenly tricky economic and stock market environment.  Comcast feels otherwise and investing for one of the likely few spots available alongside Disney and Netflix to become a global media powerhouse — and survivor — was deemed more important.  As long as we have confidence in the cable business, we will give CMCSA shares the benefit of the doubt.

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.