Introduction
We review our Comcast (NASDAQ:CMCSA) investment case five months since our last update, with the share price having risen 31%. Since we initiated our coverage with a Buy rating in January 2020, Comcast shares have gained 25.6% (including dividends), in line with the S&P 500. Cable peers Charter (CHTR) and Altice USA (ATUS) (both Buy-rated) have also done well, and all three outperformed both Verizon (VZ) and AT&T (T) significantly:
| Comcast Share Price vs. Comparables and S&P 500 (Since 2020)
Source: Yahoo Finance (31-Mar-21). |
Buy Case Recap
We believe Comcast to be a multi-year compounder with defensive qualities, driven by its Cable Communications ("Cable Comms") business. At our initiation, we expected an EPS CAGR of 10%+, driven by mid-to-high single-digit EBITDA growth, leverage and buybacks.
After the COVID-19 outbreak, we re-iterated our Buy rating repeatedly through 2020, as each set of quarterly results showed the resilience of Comcast's earnings. As of October, we expected Free Cash Flow ("FCF") to be flat in 2020, to resume growing in 2021 and to be $3.92/share in 2023.
Q4 2020 results and recent management comments support our views.
Strong Long-Term Growth Record
Comcast had a record of growing EBITDA at high-single-digits. In 2012-17, group EBITDA grew at a CAGR of 7.0%, with Cable Comms at 5.3% and NBC Universal ("NBCU") at 14.9%. In 2017-20, pro forma the $39bn Sky acquisition in 2018, group EBITDA has been flat - after a 10% decline in 2020 due to COVID-19; however, Cable Comms EBITDA still had a CAGR of 6.2%:
| Comcast EBITDA by Segment
Source: Comcast company filings. |
Financial leverage magnifies the impact of EBITDA growth on Net Income, and buybacks add to EPS growth. Just before the Sky acquisition, 2017 EBITDA growth of 6.2% led to Net Income growth of 16.1% and EPS growth of 18.4%. Conversely, in 2020, with EBITDA down 10.0%, adjusted EPS was down 16.6%. However, FCF was flat-ish (down 0.9%):
| Comcast Financial Headlines (Q4 2020 & FY)
Source: Comcast results release (Q4 2020). |
The EBITDA and EPS declines in Q4 were worse due to costs (especially sports programming costs) returning ahead of revenues recovering.
Strong Structural Drivers in Cable
Cable Comms EBITDA growth was in the 5-6% range historically but accelerated to high-single-digits in 2019 and 2020:
| Comcast Cable Comms Growth Rates & Margin
Source: Comcast company filings. |
Cable Comms has several structural growth drivers:
- High-Speed Internet ("HSI") revenues grew at a CAGR of 9.5% in 2017-20, driven by rising penetration, speed and price
- Business Services had generated $1.75bn of new revenues since 2017, a quarter of Cable Comms revenue growth, with a CAGR of 8.4%
- Wireless was launched in 2017 and reached $1.57bn of revenues by 2020
Comcast gains in HSI are helped by its advantages in “speed, coverage and control" for consumers. They also benefit from Flex, its streaming aggregator , which cut churn among broadband-only subscribers by 15-20%; and by its Wireless bundling, which similarly cuts churn by approx. 20 bps.
Comcast has recently expanded its MVNO agreement with Verizon and purchased its own spectrum. Wireless is expected to be profitable in 2021.
Cable Comms margin has been expanding due to the mix shift from low margin Video to high-margin HSI, and to efficiencies like automation.
2020 was a particularly strong year for HSI, with COVID stay-at-home driving subscriber net adds to 2.0m. Video subscriber losses accelerated but had little impact on profitability:
| Comcast Cable Comms Customer Numbers Source: Comcast company filings. |
This is because Video revenues are already low-margin. Video revenues less programming costs are approx. $2bn per quarter, compared to segment EBITDA of $6bn+, falling but slowly:
| Comcast Cable Comms EBITDA vs. Video Revenues & Costs
Source: Comcast company filings. |
EBITDA growth at Cable Comms leads to outsized growth in FCF because CapEx is not rising as fast. After investments in 2015-17, “capital intensity” (CapEx / revenues) has been falling, and CapEx fell in $ terms in some years:
| Comcast Cable Comms EBITDA and CapEx (Since 2012)
Source: Comcast company filings. |
COVID-19 Impacted Only Some Businesses
Group EBITDA remained resilient through 2020, primarily due to Cable Comms staying strong; only some NBCU segments and Sky were impacted. Restructuring costs were $828m and Peacock losses “approached $700m” - both are reported in “Group Corporate, Other & Eliminations”:
| Comcast EBITDA by Segment (2019-20)
Source: Comcast results supplement (Q4 2020). |
Even for NBCU and Sky businesses that were affected by COVID-19, Q2 was resilient some of the impact only came in Q4, due to investments:
| Comcast EBITDA by Segment – NBCU & Sky (2019-20)
Source: Comcast results supplement (Q4 2020). |
Sky "Pubs and Clubs" Hit
Sky full year EBITDA was down 37.6% (excluding currency) as the lockdown reduced "pubs and clubs" subscriptions and ad revenues. It was up 0.2% year-on-year in Q2, down 45.4% in Q3 (as sports programming costs returned), and down 82.3% in Q4 (as investments were resumed):
| Sky P&L Headlines (Q4 2020 & FY)
Source: Comcast results release (Q4 2020). |
Some NBC Universal Businesses Affected
Not all NBCU businesses were impacted by COVID-19.
Theme Parks was inevitably hit, going from an EBITDA of $2.46bn to a loss of $0.53bn, but it was breaking even in Q4 (excluding Beijing pre-opening costs).
Cable Networks and Broadcast TV actually had higher EBITDA for the year, as cancelled sports events meant lower programming costs. Broadcast TV was also helped by continuing growth in retransmission revenues; its Q4 EBITDA was down partly due to the timing of content licensing deals.
Filmed Entertainment EBITDA was down only 5.8% for the full-year. Far fewer theatrical film releases meant far lower release costs, and Comcast also generated revenues by releasing movies on Premium Video On Demand. However, this may mean lower post-release revenues in future years.
| NBCU P&L Headlines (Q4 2020 & FY)
Source: Comcast results release (Q4 2020). |
Peacock (launched in April 2020) had revenues of $100m and EBITDA losses that “approached $700m”. These are reported in the “Corporate” line and not in the figures above. However, figures based on a new organizational structure that brought Peacock, cable networks, broadcast networks and TV stations into a "Media" business showed that it still made substantial profits overall:
| Comcast EBITDA by Segment – New NBCU Structure (2019-20)
NB. Peacock launched on Comcast in Apr-20 and nationally in Jul-20. Source: Comcast results supplement (Q4 2020). |
Confidence in Long-Term Structural Growth
Structural growth drivers behind most Comcast businesses will likely remain powerful for years to come.
While Cable Comms’ HSI subscriber growth was exceptionally large in 2020, it has been consistently strong in prior years:
| Comcast Cable Comms Customer Net Adds by Type
Source: Comcast company filings. |
For 2021, on an already higher base after 2020, management expects solid HSI subscriber growth similar to the 2019 level, and comments in mid-March confirmed this was on track:
“High-speed internet customer additions remain healthy. And we have all the pieces in place for 2021 to be a very strong year ... we view 2019, which was also very strong for us, as the more appropriate year against which to benchmark our performance.”
Mike Cavanagh, Comcast CFO (Q4 2020 earnings call)
“We feel good about the momentum in broadband net adds that we bring into the first quarter of 2021 ... on the back of strong trends in new connects, together with a continued strength in keeping churn down.”
Mike Cavanagh, Comcast CFO (Deutsche conference, March 10, 2021)
Other growth drivers, including margin uplift and lower capital intensity, were also reaffirmed:
“Mike Cavanagh, our CFO, at earnings said, we're confident in our ability to increase profitability, expand margin and improve capital intensity in 2021 and beyond. So I want to reaffirm that that's how we feel.”
Brian Roberts, Comcast CEO (Morgan Stanley conference, March 3, 2021)
We are confident in Theme Parks EBITDA recovering quickly after COVID-19. There is pent-up demand for travel and entertainment, as evidenced by how Orlando consistently reached its (reduced) peak capacity during 2020. Growth will also be supported by new projects, including Super Nintendo World in Japan (opened in March), Beijing (opening in summer 2021) and Epic Universe at Orlando (construction just resumed, set to open “a couple of years down the road”).
Sky has the ambition to “more than double EBITDA over the next several years” (from $2.0bn in 2020, it was $3.1bn in 2019). Management believe this can be achieved with growth in the U.K., Sky’s home market where it is market leader and has historically grown EBITDA at high-single-digits. Post-COVID recovery will be quick, as evidenced by how virtually all “pubs and clubs” subscriptions were regained when the first lockdown was relaxed. Near-term opportunities for Sky include market share gain, SMB broadband and mobile in the U.K., and broadband in Italy.
NBCU Media and Studios are where the degree of uncertainty is higher, given strong ongoing competition in streaming. However, NBCU has leading media franchises that are second only to Disney's (DIS), and will remain a key player. Media and Studios P&L have remained resilient during 2020, and Peacock has gained more than 33m sign-ups in the U.S. by January 2021.
Valuation
At $54.98, on 2020 financials, Comcast shares are trading at a 21.2x P/E and a 4.7% FCF Yield; on 2019 financials, the P/E is 17.7x:
| Comcast Earnings, Cashflows & Valuation
Source: Comcast company filings. |
The Dividend Yield is 1.8%, after the dividend was raised to $1.00 per year at Q4 2020 results.
Net Debt / EBITDA was 2.9x at Q4 2020, only 0.1x higher year-on-year despite the 10% EBITDA decline, thanks to repayments. Management expects this to return to below 2.5x by 2022 year-end (compared to 2.0x before the Sky acquisition and 3.5x after).
Comcast still owns one third of Hulu, and has a put/call option with Disney exercisable in January 2024, with a minimum valuation of $9.17bn.
Buybacks are expected to resume in the “back half” of 2021. A figure of $5bn (2% of market capitalization) was mentioned, and seems likely to be executed over before 2022 year-end.
Illustrative Return Forecasts
Our revised forecasts are below. The key assumption is Cable Comms EBITDA will grow at 6.0% a year (unchanged); NBCU and Sky EBITDA are assumed to both recover by 2022 and resume growing solidly thereafter:
| Comcast Illustrative 2021-24 Forecasts
Source: Comcast company filings, Librarian Capital estimates. |
Compared to our October forecasts, 2021 FCF is 4% higher and 2023 FCF is 8% higher. The forecasts imply a 2019-24 CAGR of 5.4% in EBITDA and 9.7% in FCF. Including buybacks, this gives a FCF / Share CAGR exceeding 10%.
We keep other assumptions unchanged:
- Dividends to be based on a 33% payout ratio (on FCF)
- Share count to be reduced by 2% a year by buybacks
- 2024 exit FCF Yield of 6.0%, implying a 2.0% Dividend Yield
Our new 2023 FCF / Share of $4.27 is 9% higher than before ($3.92). With shares at $54.98, we expect an exit price of $78 and a total return of 52% (12.2% annualised) by 2024, in just under 4 years:
| Illustrative Comcast Return Forecasts
Source: Librarian Capital estimates. |
Conclusion
Comcast has continued its journey as a multi-year compounder, and we believe Free Cash Flow / Share CAGR will be 10%+ in the future.
Cable EBITDA growth was 8.6% in 2020, thanks to record internet subscriber growth during COVID, and will likely be 6% thereafter.
In NBC Universal, Theme Parks were inevitably impacted by COVID but are now breaking even, and other businesses have been resilient.
Sky was hit by COVID’s impact on “pubs and clubs” subscriptions and ad revenues, but expects to double its EBITDA over the next few years.
With shares at $54.98, we expect an exit price of $78 and a total return of 52% (12.2% annualised, including an 1.8% Dividend Yield).
We reiterate our Buy rating on Comcast.
Note: A track record of my past recommendations can be found here.
