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Morningstar | Comcast Reports Strong 2Q Despite Video Subscriber Losses; Sky Bid Remains a Priority

Comcast posted a strong second quarter as revenue met Street expectations and EBITDA beat consensus projections. Despite video subscriber losses of 140,000, cable communications revenue improved 3.4% as revenue from business services and high-speed Internet continues to grow. The firm recently pulled its bid to acquire the Fox assets, but management reiterated on the call that Comcast remains interested in purchasing Sky. We are maintaining our wide moat rating and fair value estimate of $42 per share. With the shares currently trading in 4-star territory, the current price may provide investors with an attractive entry point.

Comcast posted its fifth straight quarterly decline in television customers as it lost 136,000 residential video subs in the quarter. Management once again attributed the decline in video subs to greater competition from the lower-priced over-the-top pay-television platforms and resulting competitive responses from other traditional distributors. We continue to expect that new entrants to the television market will challenge Comcast’s ability to grow in the coming years, but we believe AT&T, its largest rival, will face greater challenges in traditional pay-TV delivery. Residential Internet access customer growth accelerated versus last year as the firm had 226,000 net additions during the quarter, up sharply from 397,000 a year ago. Xfinity Mobile posted another strong quarter with 204,000 net adds, ending the quarter with 781,000 subscribers. Total cable revenue growth of 3.4% year over year was driven by rate increases, customer growth, and more customers subscribing to additional services. Cable EBITDA margin improved  20 basis points to 41.1% as the higher revenue more than offset the 3.3% increase in content costs arising from higher retransmission fees and sports rights costs.

NBCUniversal revenue was flat with the year-ago quarter at $8.3 billion as growth at the cable networks and broadcast divisions was offset by the weak slate at filmed entertainment. The cable network improved 8.2%, driven by growth across the board in ad revenue, affiliate fee growth, and content distribution. Despite ratings declines and a smaller sub base, ad revenue improved 3.6% due in part to the strength of MSNBC. Broadcast network revenue grew 6.7% due to retrans growth and the impact of the World Cup at Telemundo. Retrans revenue increased 20% to $437 million, putting the firm on track to beat its $1.6 billion projection for 2018. While management has been considerably less vocal about the retrans opportunity versus peers at other broadcast networks (particularly CBS), we note that NBC owns a number of must-watch properties, including Sunday Night Football and the Olympics, that should help the channel drive continued retrans revenue growth over the next few years. Telemundo’s broadcast of the football World Cup helped to drive ad revenue growth of 9.2% for the segment. Theme parks revenue improved 3.6% despite suffering from the timing of spring break this year. The Universal film segment was down 20% versus the second quarter last year due to a tough comp from the strong film slate last year and fewer films in the quarter.

One of the highlights in the quarter was strong free cash generation of $4.3 billion, up significantly from $2.4 billion in the second quarter of 2017. Comcast also repurchased $1.25 billion in shares during the quarter and plans to repurchase another $2 billion in the second half of 2018. Even with the repurchases, the firm lowered its net leverage to just below 2.1 times EBITDA, the lowest in two years. We believe that the strong free cash flow generation along with a clean balance sheet puts Comcast in a good position to pursue the Sky acquisition, which management continues to view as a unique opportunity.