On Thursday, Comcast Corp. (CMCSA, Financial) reported financial results for the third quarter of fiscal 2020. As CEO Brian Roberts noted, it was a record quarter in the company's core cable business:
"It is this unique combination of broadband products and services that led to this quarter's 556,000 net new customer relationships and 633,000 net new high-speed Internet subscribers, both the best quarterly record in our company's history."
These results, which are inclusive of customer-friendly actions in the second quarter, put Comcast on pace for more than 1 million net high-speed internet subscribers in 2020 β marking the 15th consecutive year that Comcast has cleared this hurdle. As shown below, the company now has more than 30 million high-speed internet customers β up more than 50% since 2013.
The financial trends in the cable communications segment through the first nine months of 2020 continue along the same trajectory we've seen in recent years, with growth driven by residential and business services (collectively up 8% through the third quarter to $21.3 billion due to subscriber growth and higher rates). Year to date, the cable communications segment's revenues have increased in the low-single digits, with Ebitda up 7% (margins up 200 basis points to 42.1%). As shown below, 2020 will be the fourth consecutive year that segment profitability has outpaced revenue.
In addition to margin expansion, capital intensity continues to decline, with segment capital expenditures down 6% through the first nine months of 2019. As a result, segment net cash flow has increased by 12% over the same period to $14.2 billion.
The shift in strategic focus (leading with connectivity) has successfully addressed some structural changes in the market. At the same time, Comcast has relied on some of its other assets to try and solidify this position. As Roberts noted on the conference call, "Adding Peacock to broadband is resulting in significant improvement in both churn and gross ads, as Peacock is continuously cited as a differentiating factor at the point of sale for Xfinity broadband."
While I have some questions about this data point (please quantify "significant improvement"), it also suggests that Comcast may find a way to intelligently use its diversified business portfolio in an attempt to further strengthen its core connectivity businesses. (For what it's worth, Peacock now has 22 million sign-ups, compared to 10 million at the end of July and 15 million in mid-September.)
But while cable communications continues to march forward, the remainder of Comcast's businesses continue to be under pressure (I would argue this is a mix of temporary pressures from the pandemic and structural headwinds). In the NBCUniversal division, the quarterly results were materially impacted by the theme parks business: as noted on the call, Ebitda in the segment would've increased by 9% year over year if the P[arks were excluded (that said, this includes a meaningful tailwind from content licensing to Peacock, with the costs attributable to Peacock thrown into corporate). While there's some reason for optimism, I think the reality is that there's a long way to go before the theme parks returns to the levels that were commonly reported pre-pandemic.
At Sky, constant currency revenues were unchanged from the year-ago period, with Ebitda falling meaningfully as a result of higher programming and production costs due to the return of major sporting events. Total customer relationships, at 23.7 million, declined by roughly 1% from a year ago. Management continues to profess the importance of this acquisition to Comcast as a whole, as well as to forecast meaningfully improved results for Sky on its own. While I think I see the long-term merit of what they're discussing, I would also note that the results have been underwhelming to date. As we move past the worst of the pandemic, my hope is that we'll start to see a meaningful improvement in the underlying results at Sky.
Year to date, cash flows from operations have increased by 1% to $19.7 billion, with free cash flow up 6% to $11.6 billion (due to lower capital expenditures). Over the past year, the company has repaid more than $8 billion in debt, with consolidated net debt at quarter end of $89 billion (at a weighted average cost of 3.6%). While the leverage ratio has remained in the high two's in the short-term (due to the pressure on Ebitda), Comcast continues to reduce its outstanding debt, which should put the company back in position to repurchase shares in the relatively near future.
Conclusion
There's a lot going on at Comcast right now. While the pandemic has been a meaningful headwind to NBCUniversal and Sky, the cable communications segment has continued to report strong results. Looking out over the next five years, it seems to me that Comcast is at a crossroads. In areas like X1, Flex and Peacock, the company has a handful of bets that will likely require a commitment of further resources β and potentially significant financial resources β if they're truly going to be successful. It will be interesting to see how Comcast evolves over the next few years.
In terms of valuation, my math has Comcast trading at less than 15 times forward earnings. I think that valuation reflects the concerns that some market participants have about management's capital allocation decisions (acquisitions like NBCUniversal and Sky). Time will tell if their concerns prove warranted. At this time, I'm comfortable continuing to hold a sizable position in Comcast.
Disclosure: Long Comcast.
Read more here:
- Microsoft: A Strong Start to Fiscal 2021
- Investment Note - October 2020
- Berkshire Hathaway: 2001 Morning Session
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