Comcast remains a tale of three cities: cable, NBC Universal (NBCU), and Sky.  Fortunately for investors, the dominant business – cable – is a clear COVID winner with attractive secular prospects.  On the other hand, NBCU and Sky are COVID losers facing secular challenges.  Results in 3Q20 were very strong in cable led by broadband.  NBCU and Sky had better results than expected but both saw sharp declines in operating cash flows thanks to the impact of COVID on movie releases, advertising, and theme parks. 

We have always felt that Comcast has done a good job managing the NBCU assets from a financial perspective.  Unfortunately, the changing nature of TV and video consumption has led NBC and cable networks like USA and Bravo to be in long-term decline.  Comcast was slow to change direction strategically, but the combination of its flex box for broadband only households and the launch of Peacock offer some hope for positive offsets.  We like the Universal theme parks, but this business will remain under pressure until there is a widely distributed vaccine.  We also like the Universal film and TV studio, but it also must wait for a recovery until COVID is in the rear view mirror.

We never liked the Sky acquisition as we felt Comcast paid way too much and the strategic rational was weak.  As with the rest of Comcast, Sky is a well-run business, but it faces similar challenges to U.S. cable and satellite businesses from cord cutting, lost advertising market share, and high content costs, especially for sports rights.

Given Comcast’s leadership position in cable broadband and the valuations accorded other pure-play cable stocks like Charter Communications and Cable One, an argument can be made that Comcast shareholders would be better off if NBCU and Sky were sold or spun off.  However, this seems highly unlikely given that Comcast’s CEO Brian Roberts drove the acquisitions of these businesses and he has voting control of the company.  Not all is lost though.  When COVID subsides and a proven vaccine is available, there will be a big cyclical turn in the troubled businesses.  This will build on already strong free cash flow driven by the cable business and move Comcast’s balance sheet from a position of strength to excess capital.  We believe this story will develop over the next several quarters after which stock buybacks will resume.  A sign of what is to come on shareholder value initiatives is the company’s 10% dividend hike this year even as COVID severely penalized the company’s finances.  Comcast has now raised its dividend for 12 consecutive years.

We still feel the shares can grind higher to low-$50s based on the depressed valuation.  Comcast has aspects of COVID winners and COVID losers.  We think the broadband business is not only a COVID winner but also has good long-term growth prospects.  The COVID loser businesses should inflect sometime in 2021.  This combination of secular and cyclical growth is a good set up for investors over the next year. 

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.