In what has become routine, Comcast (CMCSA) reported solid results with strength in the cable business offset by weaker trends at NBC Universal.  Northlake sees more value creation on the distribution side looking ahead to 2020 and 2021 as the company increasingly becomes a broadband supplier rather than a video distributor.  We all read a lot about cord cutting and Comcast lost another 238,000 cable subs this quarter.  Cable subs are declining by over -2% a year now.  However, broadband subs grew by 379,000, the largest third quarter in 10 years.  This shift from video to broadband is very beneficial to Comcast’s financial results as broadband subs are more profitable and require less capital spending.  Management appears willing to let go of video subs, especially those that less profitable in order to boost financial performance.  As long as broadband continues to grow, this works for shareholders and Northlake thinks there is still upside for Comcast to gain market share in broadband.  Within its footprint, broadband is about 82% penetrated but Comcast’s share is only 48%.  Cable has the best broadband product and the company continues to upgrade the network and innovate its product and service offerings.  Most recently, the company announced it would offer a Flex box to broadband only customers at no charge.  Think of Flex as similar to Apple TV, Chromecast, or Roku.  This is a great way to win and retain highly profitable broadband customers.

Unfortunately, NBC Universal and Sky are losers from cord cutting as fewer cable and satellite subscribers hurt profitability at the company’s broad array of channels, TV networks, and TV stations.  Comcast management is doing a good job of mitigating the cord cutting headwind and NBC Universal benefits from being linked to the company’s cable and broadband business.  For example, Comcast will soon be launching Peacock, an ad-supported streaming service somewhat akin to Hulu’s ad-supported service.  Comcast can also cross-promote and offer unique value around its NBC Universal content including tons of extra content for the Olympic rights it controls.

We feel the positives in cable outweigh the negatives at NBC Universal and Sky.  Furthermore, strong free cash flow generation is allowing Comcast to steadily reduce leverage from its acquisition of Sky, setting the stage for a continuation of double-digit dividend growth and a resumption of share buybacks late next year.

Comcast is a core holding thanks to its high-quality management, free cash flow generation, and consistent financial performance.  We see upside to the low to mid-$50s based on expected 2020 results which added to the 2% dividend yield sets up a 15-20% total return.  Given defensive characteristics of the utility-like broadband business that is the primary driver of the company’s results, Northlake finds Comcast shares attractive in an uncertain economic and geopolitical environment.

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.