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August 13, 2013

Comcast and Liberty Global Remain Leaders in Bullish Cable Industry

Cable stocks have performed well this year due to a combination of steady moderate growth, industry consolidation rumors, and companies returning cash to shareholders via dividend increases and share repurchases. The most recent set of quarterly earnings reports support current bullish trends in these areas. Northlake clients own positions in Comcast (CMCSK) and Liberty Global (LBTYK) and I think plenty of upside remains.

Comcast reported another quarter of better than expected results. Consolidated revenues grew 7% with operating cash flow up over 8%. Comcast gets over 60% of its revenue from its cable business and despite all sorts of doom and gloom about cord cutting, this division reported revenue and cash flow growth of 6%. The company is losing cable TV customers although at a slower pace than a year ago. Growth continues in high speed internet and in small and mid-size business accounts. Comcast’s NBC Universal division enjoyed 9% revenue growth and 21% EBITDA growth as it continues to look that Comcast made a well-timed initial and final investment in NBCU ahead of an accelerating turnaround.

Comcast continues to aggressively buy back its own shares, leveraging the 8% cash flow growth into 30% EPS growth. Leverage continues on the conservative side given the stability of the company’s operating and financial model. This means share buybacks should remain aggressive and the dividend should continue to rise. Comcast shares trade at just 6.5 times 2014 EBITDA, a discount to other cable companies and entertainment companies. I see no reason for the discount to persist given that cable consolidation is being driven by a desire to reach the scale that Comcast already has achieved. Continued steady cable growth and the NBCU turnaround can comfortably propel the stock in the mid $50s.

Liberty Global reported its first quarter since closing on its acquisition of Virgin Media. The report was messy since Virgin was only owned for a few weeks of the quarter. Adjusting for currency, the acquisition, and other one-time items, LBTYK reported rebased revenue and EBITDA growth of 4%. This met street expectations but was a little slower than recent quarters. I thought the conference call was slightly defensive as management defended its move into the UK via Virgin, responded to the tough competitive environment in the Netherlands (negative EBITDA growth), and noted that it was beginning to shift its strategy in Germany from subscriber growth to harvesting the financial benefits of subs added over the last few years. Over the next few years, LBTYK will enjoy very rapid free cash flow growth with which it will continue its multi-decade history of aggressive share repurchase and growth via acquisition. Slowing capital spending as a percent of revenue could allow free cash flow per share to rise to over $10 in the next few years, easily supporting a stock price north of $100. A slight pickup in rebased growth may be necessary for the stock to take the next leg up but I am very confident that a little bit of patience will be very well rewarded.

Comcast and Liberty Global are 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. Comcast and Liberty Global are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, consumer retail, communications, and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the funds.

Posted by Steve Birenberg at August 13, 2013 12:54 PM in LBTYK