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April 23, 2014

Comcast Remains a Very Best Idea

Comcast (CMCSK) reported better than expected 1Q14 earnings. The upside came from NBC Universal, a good thing given the magnitude of the financial upside in a successful turnaround,. However, Comcast financial performance and stock sentiment is driven more by the much larger cable business. On that side of the company, results were very slightly disappointing but nothing to worry about given seasonal factors, the timing of price increases, and possibly management’s desire to keep results in check with government scrutiny high ahead of the regulatory review of the proposed takeover of Time Warner Cable.

Make no mistake. Comcast is powerful company with an excellent financial profile. Overall revenue grew 13.7% with operating cash flow up 10%. These figures were juiced by the big ad revenue from NBC’s telecast of the Winter Olympics and huge upside at the Universal movie studio (movie profits are had for analysts to model). The core cable business saw revenue and operating cash flow grow by 5.3% and 4.3%, respectively. Both figures were about 50 basis points below expectations driven primarily by Comcast putting in place lower and later price increases than expected. Video subscribers grew for a second consecutive quarter showing the power of the company’s scale and the success of its industry best X1 operating system. High speed data and voice subscriber additions were both below expectations, a possible concern given that broadband is the growth driver of the consumer cable business. Management expressed no concern, however, and attributed any disappointment to the normal course of business.

After falling about 8% from its pre-Time Warner Cable merger announcement all-time highs, CMCSK shares have acted well since the report, rising about 3%. Beyond the generally solid reported numbers, investors were cheered by comments surrounding materially larger share buybacks using proceeds from any divested cable systems. The company expects to sell 3-4 million of the 11 million Time Warner Cable subs it is trying to acquire. Recent news reports suggest the sale process is going well. Investors may also be responding management comments indicating very high confidence in deal synergies and upside form the proposed merger.

Comcast remains one of my very favorite stocks looking out over the next twelve months. Regulatory overhang surrounding the merger approval process may present a headwind but I see upside of 20-30% with the higher end assuming approval of the Time Warner Cable merger with strict conditions. Presently, Comcast trades at about 7.2 times 2014 EBITDA and 12 times free cash flow. I think this is a bargain in a growth starved world for large cap companies. My target assumes slight multiple expansion and does not consider full upside of what is looking like a very real turnaround at NBC. Share buybacks and a 1.8% dividend yield provide support as does the very stable financial model.

CMCSK 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. CMCSK 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.

Posted by Steve Birenberg at April 23, 2014 11:32 AM in Comcast/Cable TV