Comcast remains a tale of COVID winners and COVID losers.  The cable/Xfinity business is performing great, driven by broadband.  Cord cutting has minimal impact given margin dynamics and the fact that you cannot really cut the TV cord without maintaining the broadband cord.  The NBCUniversal and traditional media side is still feeling pressure from COVID.  Cord cutting acceleration hurts NBC and the company’s cable networks.  These businesses also are hurt by weak advertising related to the recession and directly impacted advertisers in travel, hospitality, and services.  NBCU also is a major theme park operator.  This business is very slowly recovering and remains way down vs. 2019. Finally, NBCU is major film studio so the closure of theaters and limited attendance where they are open has been a big loss.  Comcast Sky business in Europe faces similar impacts from COVID on advertising and cord cutting without the benefit of a broadband business.

In 4Q20, cable saw customer relationships, revenue, adjusted EBITDA, and free cash flow rise 5.1%, 6.3%, 12.3%, and 26.1%, respectively.  NBC, on the other hand, saw revenue fall 18.1% and adjusted EBITDA decline 20.7%.

Northlake feels better about the outlook for Comcast shares coming off 4Q20 results.  First, we think the cable business will hold onto decent growth in 2021 despite tough comparisons to the work from home broadband boom.  Management guided 2021 to look similar to 2019, which was a very good year for Xfinity with adjusted EBITDA rising over 7% and a then best in a decade gain in broadband subs.  Second, NBCU should see much improved results as hopefully COVID impacts steadily fall through 2021 and into 2022.  Theme parks and movie theaters should fill up and advertisers will fully reengage as consumers emerge from their homes anxious to spend money.  Sky should benefit also benefit from improved advertising demand and also as pubs reopen and turn their TV subscriptions back on.  This scenario sets up Comcast as a long-term COVID winner thanks to broadband gaining permanent importance and COVID loser businesses enjoying a cyclical rebound.

As important as the fundamental business outlook, Comcast’s financial profile is improved.  The company has been paying down debt in lieu of buybacks since what we still view as the ill-advised acquisition of Sky.  Leverage is now below 3X EBITDA and should hit the long-term target of 2.5X in 2022.  CEO Brian Roberts indicated that Comcast would resume share buybacks in 2021.  Buybacks are a very shareholder friendly way for management to spend the company’s massive and growing free cash flow.  A return to buybacks also suggests Comcast is strategically complete and no major acquisitions are on the horizon.  Neither should there be a big investment to build out a wireless network or buy or spend heavily on steaming services.  Peacock is off to a good start as the company’s streaming effort and a restructuring that combines Peacock, NBC, and the cable networks should efficiently produce sufficient content to support all three businesses.

Using an average of 2021 and 2022 EBITDA to account for the recovery of the COVID loser businesses, we now see a price target of $58 for Comcast.  This could prove conservative as we are only giving Comcast credit for about 15% of the free cash flow it will generate over the next two years.  Risks include headlines around net neutrality, tough comparisons for broadband in 2021, increased broadband competition from telco 5G and fiber builds, and any decision to materially increase investment in streaming.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.