Trian’s investment in Comcast highlights stock underperformance but is unlikely to trigger major changes

Investors like Trian’s Nelson Peltz are used to calling the shots and agitating for change. So why would Peltz take a stake in Comcast, a controlled company with a decades-long history of strong management?

The answer may be simple: to highlight an undervalued company. Peltz could conceivably be a winner simply by picking a cheap stock. Trian said earlier this week that it’s held “constructive discussions” with management but hasn’t officially asked for a particular change.

“The pendulum of investor confidence now under-appreciates Comcast’s strategic intelligence and commitment to long term value creation,” said Peter Supino, an analyst at Bernstein, in a note to clients. 

But, if Trian is just betting on investors to suddenly fall in love with Comcast, initial reactions weren’t encouraging. The market shrugged at Trian’s announcement that it had acquired a 0.4% in Comcast. Shares were little changed on the announcement and have actually fallen in the days since.

Comcast is the parent company of NBCUniversal and CNBC.

Comcast chief executive officer Brian Roberts has a 33% voting share through his family’s ownership stake. Unless there’s a shareholder mutiny at an enormous scale — highly unlikely — Roberts can simply tell Peltz to kick rocks. Stocks often surge on news of an activist bet. In this case, the lack of a reaction can be summed up by this: big changes probably ain’t coming. 

The most obvious activist ‘ask’ would be splitting Comcast’s cable operations from Sky and NBCUniversal, whose entertainment cable networks, such as E!, Bravo, USA and Syfy, are no longer relevant in a streaming video world. New NBCUniversal CEO Jeff Shell is already restructuring the company to centralize decision making and cut jobs.

The pandemic has further underscored NBCUniversal as an anchor on Comcast shares, with Universal theme parks shut down for months and now operating at limited capacity. Movie theater attendance has also crumbled, causing Shell to eliminate a longstanding detente with theaters around windowing to bring certain films straight to Peacock, NBCUniversal’s streaming service. 

“There are a lot of investors who would like to see Comcast broken into two separate pieces,” MoffettNathanson analyst Craig Moffett said. “I don’t know if that is or isn’t what Trian is asking for, but it very likely would result in a higher valuation, and it wouldn’t cost Comcast anything to do.”

Roberts has always had a long-term view of NBCUniversal. Trian’s involvement is unlikely to change his mind, according to people familiar with the matter.

But Comcast’s recent underperformance versus Charter — a pure-play cable company — is startling. Charter, the second-largest U.S. cable company, has a trailing price-to-earning ratio of about 60 and a forward P/E ratio of more than 30. Comcast’s relative ratios are 18 and 15, respectively. Charter’s 2021 EV/EBITDA ratio is about 11.5x. Comcast’s is about 9x. 

Charter shares have gained 50% over the past 52 weeks compared to the S&P 500’s 9% gain. Comcast shares are up 2% over the same time period. Shares of Comcast are up about 46% over the past five years, compared to shares of Charter, which are up 221%.

Comcast’s underperformance is more galling because it’s long been viewed by investors and analysts as a best-in-class cable operator. The company’s cable and digital video user interfaces, Xfinity X1 and Flex, are so good that other cable companies license them. 

Of course, video is an after thought for cable companies these days. Broadband penetration is what investors care about, given the business’s gaudy profit margins. But there, too, Comcast is succeeding. Roberts said earlier this month the company was adding internet customers at a record pace in the third quarter while not caring whether they signed up for cable TV.  

Broadband is “the heart and soul of the company,” Roberts said at Goldman Sachs’ Communacopia conference on Sept. 15 — perhaps cagily speaking to investors like Trian.  

“Broadband, it goes without saying, is in general a fantastic business for us and one we believe that will have great growth to come in the years ahead,” said Roberts, who estimated new customers would “greatly exceed” last year’s record high of 1.4 million net adds.

Ironically, NBCUniversal is doing more for broadband penetration than ever before. When Comcast acquired all of NBCUniversal in 2013, there were few synergies between the content business and cable distribution. If anything, the NBCUniversal acquisition signified a hedge on the cable distribution business. At the time, cable networks were pushing programming cost increases at a 10% clip each year. Owning networks helped Comcast push back on diminishing video margins, as the cable company couldn’t pass along cost increases as fast as programmers jacked up prices on networks.

Now, as cable networks slowly fade away, Comcast is giving away Peacock to its broadband-only subscribers. Comcast also offers a free Flex set-top box and operating system to aggregate additional streaming content. The purpose of content is to drive broadband usage.

Still, Trian may want to emphasize to Roberts that Comcast’s value is in broadband distribution rather than entertainment. Paying tens of billions for acquisitions like European distribution and content provider Sky — the product of a bidding war with Disney — may be concerning to investors who don’t want Roberts losing focus. 

But Roberts’ view of Comcast has been that the company isn’t competing with Charter (the companies largely can’t compete anyway due to municipal rules that prevent two cable companies operating in the same footprint). Instead, Roberts views Comcast as a global media company, competing with Apple, Google, Facebook and other giants that have the resources to dominate people’s lives. Acquiring Sky gives Comcast an entry way into global growth that had previously been unattainable as a U.S.-only company.

The most out-of-the-box answer for Comcast may be to financially engineer a way to give investors a chance to invest in its cable operations business without the content interference.

Comcast could do this by inventing a tracking stock that mirrors its broadband-only business (like John Malone’s Liberty Broadband) or it could sell shares in Comcast cable to publicly trade, giving investors a chance to buy in to the broadband business while still owning and controlling all assets.

Dell has a similar structure with VMware. It owns more than 80% of VMware while floating the rest of the company. Investors can put money directly in the virtualization company without being dragged down by Dell’s lower-growth legacy technology assets.

Still, those structures tend to be messy and often temporary. Dell has twice toyed with the idea of acquiring or reverse merging into the VMware stub and is now taking steps to spin off its stake to reunite the majority and minority stakes. 

And while Roberts is known as an “investment banker in chief” because of his proclivity over the years for deals, the benefits of being a controlling shareholder are that you don’t have to worry about short-term trends.

“We at Liberty try to look at the long term, and I think Brian does the same,” Greg Maffei, Liberty Media’s CEO, said Thursday in an interview with CNBC’s Squawk Box. “He has several businesses which are strong now, including the cable business. Comcast runs a very good cable company. It’s going to have big growth with broadband subs. And then he’s got other businesses in a headwind because of Covid. I think he’s certainly concerned with the current performances of those businesses, but I think he’s more concerned with the long term.”

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.

Watch: Liberty Media’s Greg Maffei on Trian taking a stake in Comcast