You would not know it from the constant headlines about cord cutting but things are going quite well at Comcast.  This is because the margins are not very good on cable video subscribers which are declining, while the margins are very good and getting better on broadband internet subscribers which are growing.  Also growing with an above average margin is the business customer segment.  Thus, as long as the growth businesses stay firm, Comcast can keep growing and keep generating free cash flow from its cable business.  As management said on the call today, “the formula is working.”  We think it continues to work over at least the balance of 2019, so Northlake clients will continue to hold Comcast with a target in the upper $40s.

In 2Q19, Comcast said its cable business grew revenues 3.9% and EBITDA grew 7.4%.  This is despite losing 224,000 video subscribers and seeing video subscribers fall by -2% since a year ago.  Both broadband internet and business services grew revenue by 9-10% driving the attractive financial performance.  Also helping is the mix shift away from video which saw the company boost margins and free cash flow.  Management raised margin guidance and lowered capital spending forecasts for 2019 for the second consecutive quarter.

Comcast has diversified from cable via its purchases over the years of NBC Universal and Sky.  NBCU is cable and broadcast networks, a film and TV studio, and theme parks.  Sky is Europe’s largest TV distributor concentrated in the UK, Germany, and Italy.  Except for theme parks, these businesses face challenges due to cord cutting.  We are concerned about the long-term outlook but for now, there are no urgent problems.  Sky is performing better than expected so far and the company has been able to mitigate cord cutting and sharply falling TV ratings with cost cutting.  Nonetheless, the upside we see for Comcast shares is limited by the secular changes in the TV business, driven by internet-delivered TV.  Think Netflix, Hulu, Roku, and Amazon Prime Video.  We are probably closer to selling Comcast in favor of another investment opportunity than any other individual stock in Northlake’s portfolio.  For now though, the formula is working and we are sitting tight.

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.