HEDGE FUND MANAGER: Cord cutting isn't going to kill Comcast

Hedge fund manager Anthony Bozza, founder of $3 billion Lakewood Capital, is long Comcast.

He also doesn’t think so-called “cord-cutting” will be an issue for the the largest US cable operator.

In a letter to his fund’s investors dated January 25, Bozza said they believe now is an “attractive opportunity to purchase a high quality, predictable and growing earnings stream at an attractive multiple of 12x next year’s free cash flow.”

Bozza added that the move towards cord cutting and the growth of Netflix does not present that much of a threat to Comcast.

In the letter, Bozza noted that Comcast provides video, high-speed internet and voice services to 27 million households and businesses in the US. And while customers might “cut the cord,” Bozza believes that Comcast offers superior high speed internet and that’s why customers will stick with it.

From the letter (emphasis ours):

Investor concern is largely centered on the rise of streaming video providers like Netflix and the resulting risk of customers cancelling their cable video service, commonly called ‘cord-cutting.’ Although roughly half of Comcast’s cable revenue comes from video, we believe the potential impact to earnings from this issue is rather minor. Video is actually the lowest margin revenue source in the cable business due to the significant associated programming costs that are paid to third-party content providers in contrast to voice and data revenues that have virtually no variable costs. We estimate that video represents only around 20% of cable operating profit once all costs are allocated. Also, while certain consumers may opt to ‘cut the cord,’ we believe the overwhelming majority of customers believe the cable bundle still provides good value. Importantly, customers who do opt to forgo a bundled video product still need to subscribe to a standalone broadband product, which is more expensive than broadband taken as part of a double or triple play offering. In fact, consumers that are heavy users of streaming video will likely have to upgrade to even higher priced standalone broadband tiers due to their increased data requirements.

We believe that consumers will increasingly view fast internet speeds as a basic necessity, and Comcast offers the highest speed product across nearly its entire footprint. Across roughly half of its markets, Comcast competes against much slower legacy DSL offerings, and in 35% of its markets, it competes against a hybrid fibre / copper product, which becomes less competitive at faster internet speeds. The remaining 15% of the footprint has a fibre alternative that is generally comparable in quality and speed.

Lakewood began building its position in Comcast in the first quarter of 2015. The fund last held 2.19 million shares, the latest regulatory filing data shows.

The hedge fund also has a price target of $87 per share for Comcast.

“As we look out to 2018, we estimate Comcast will generate roughly $5 per share of free cash flow. Given the high-quality nature of this cash flow and the attractive growth outlook, we believe that a 17x multiple is reasonable, resulting in a target value of $87 per share (including dividends) and a total return over two years of nearly 60% from the current price,” the letter said.

Shares of Comcast were last trading down $0.53, or -0.88%, at around $58.88.

Lakewood delivered a 5.6% return in the fourth quarter of 2015, to finish the year up 2.7%.

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