Motley Fool Money - Comcast Spins Out Cable Networks

Episode Date: November 21, 2024

Comcast is shedding cable networks including MSNBC, USA Network, and CNBC from the parent, and putting them in a new company, temporarily called SpinCo. (00:14) Bill Barker and Ricky Mulvey discuss: - Nvidia’s quarter and data center growth. - Why Comcast is spinning off its cable assets. - Microstrategy’s unusual bond offering. Then, (17:04) a replay of Scoreboard, hosted by Anand Chokkavelu. Matt Argersinger and Anthony Schiavone take a look at Sunbelt REIT, Eastgroup Properties. Visit our sponsor: Get $1,000 off Vanta at www.vanta.com/fool Companies discussed: NVDA, CMCSA, MSTR, EGP Host: Ricky Mulvey Guests: Bill Barker Producer: Mary Long Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Cable networks are spinning. and you're listening to Motley Full Money. I'm Ricky Mulvey, joined today by returning champion Bill Barker. Bill, how you doing? I'm well, thanks. How are you? I'm doing well. It's good to have you back on the show, haven't seen you in a few months. We've got a little bit of Nvidia, and then I want to talk about this Comcast spin-off. Dylan's going to cover this more on the Friday show, but I want to, I mean, it's the biggest company by market cap, or it's consistently trading places is the biggest company by market cap.

and they reported earnings yesterday. I think my big takeaways are that the data center business is rolling with revenue up more than 100% from the prior year, and that's from a base of 14.5 billion. Expectations are starting to match up to what they're doing, and some investors are doing a little profit taking. What stands out to you about Nvidia's quarter? Well, it's a phenomenal quarter, and as you say, expectations were largely met, And those that figured that Invidia always exceeds expectations and not only exceeds them by normal amounts, but excessive amounts, might find that this one time, Nvidia has only exceeded expectations by a kind of normal amount and that they have beaten expectations and raised guidance, but not to the extent that has been going on in some quarters in the past.

And, you know, that's really a function of the law of large numbers. It gets harder and harder when you start talking about quarters involving $37 billion to just be, you know, increasing things by an annual rate of 100%. Also, you get more eyes once you start getting into that trillions of dollars in market cap for folks to make guesses about what kind of money you're going to make. One number I want to zero in on, because I think this is incredibly impressive for Nvidia, and a lot of investors believe it to be impressive. This is a company that makes 75% in gross margin. Have you seen anything come close to that? What is Nvidia doing to make that?

Well, certainly nothing close to it in terms of hardware and in terms of chips. And it's a function of the demand that they are able to sell at rates that are sort of unheard of. And these are gross margin rates above that level in the software space are not unprecedented. But you're talking about something in the sort of 30 percent or so range for Intel. I think their current gross margins is 34 percent, and AMDs is 48 percent. And so, NVIDIA is at 75, 76 percent. That does, as you say, highlight that they are doing something, that their competitors are nowhere close to do it.

I want to get to this Comcast story. This is big news for media observers, and that's that Comcast is spinning off its cable assets, including USA Network, MSNBC, and CNBC. Spinoff is expected to be valued at about $7 billion, not going to take hold for a year, according to reporting us on the Los Angeles Times. Before we get into the specifics of why Comcast is doing this,

this is something that stock market investors will experience sometimes. I think it recently happened with Kellogg spinning off its serial division. It happened a long time ago when GE owned the NBC Universal Assets. So broadly, why do companies spin off departments, even when they're making money, making a profit into new publicly traded companies? Well, there are going to be a variety of reasons. In this case, I think it's a capital allocation decision. You've got one part of the company, for instance, that is growing but not growing as fast as another part. And that slower growing part would like the attention of the company. I'd like to have money thrown its way. And they say, if you give us a billion dollars, we'll turn

it into $1.1 billion over two years. We will grow your investment 10% over two years. And there might be another part of the company that is saying, well, you give us a billion dollars to improve our business. We'll do double that, right? So, this is a way of letting a very sort of unified part of the company, that being that the cable channels operate with their own capital allocation decisions and prove that maybe, you know, they can, they could raise money from outside of the company or they can make deals with other cable channels that might need a new. new home in a way that becomes very uninteresting to a very large company. That is, as I think Charlie Munger or Warren Buffett, maybe Charlie Munger said to Warren Buffett, if something isn't

worth doing at all, it's not worth doing well. And so even if you can take a small thing and grow it decently, if it just doesn't move the needle on a very large company, it's kind of like who cares if you can do something interesting. It doesn't matter to the big parent. And you spin something off. It's a smaller entity and increasing something by a reasonable percentage is meaningful once you identify a small company that can allocate capital well. Well, one thing the big parent certainly cares about is streaming, streaming subscribers and getting people to watch Peacock. And one may 3rd. think that you could take these cable channels, USA Network, MSNBC, CNBC, and make them play nicely

in that streaming world. But ultimately, why don't you think that NBCU could make these channels work in this new streaming environment? I think that a lot of the sports and news coverage they've got is consumed live, the sports coverage, in particular news coverage, maybe less so. But old news is just not interesting. To be able to forever go back and watch the November 21st edition of cable news chat is not something that many people are going to go back to. If you've got what Peacock really is better at, you know, movies and shows, you don't need to watch a show within a year, 10, 15 years of when it.

came out, it's just as good years later. That's not the case for most of these channels that are going to be part of this spinoff. Yeah, and I think it's impossible to have this discussion without mentioning. Like, people have also lost a lot of trust in cable news outlets. And in terms of viewers, they're slipping viewers a little bit. MSNBC losing viewers after the election of Donald Trump. And one may think that after what happened in 2016, you would see a big spike in cable news viewerships, but that's not playing out this time. And also the median age. There's the median age for cable news viewership for not just MSNBC, but Fox News and CNBC is also around 70. So I would imagine the executives here are looking at this and saying, you know what, this is really expensive. And

we don't think we're grabbing that younger generation of viewers that are, that we want to get onto these streaming platforms. Yeah, I think all those data points are true. I think MSNBC is also potentially quite an anchor around Comcast Neck if it wants to make acquisitions and the administration is hostile to MSNBC for not being sufficiently praising the administration. They may just do exactly what has been promised, which is to exact retribution on whoever isn't on board. So I think that's maybe a consideration, but really, you know, these things don't seem to have a fascinating future in the current construction to Comcast

and to many, many, many others. So let's talk about the spinoff because the new CEO who's currently the NBCU group chair, Mark Lazarus, told a group of employees, and this is according to Los Angeles Times reporting, quote, I completely empathize with people who think that this would be a bittersweet thing. I think it's exciting because very few times in life you have the opportunity to be part of what I'll call a well-funded startup. I think there is a way to make channels like CNBC work in 2024 and grab newer generations of viewers. But how could a group of cable networks function is a well-funded startup? Is it possible?

Well, I mean, they have real viewers, real revenues. They are profitable. So as a startup mentality with a new horizon to look at, and we can take what we've got right now and rearrange it and make deals with the other bundlers, there are lots of ways to pursue the future in this business and have, at the very least, intellectually exciting time with a changing landscape. and they are not in desperate need of anybody to fund them. They've got profitable operations. So, it's, look, he's obviously spinning things too, right? Let's, let's, he's saying that he perceives this. Before I get to why this is exciting, I understand why there's a lot of fear, right?

But let me now spin that for you. All right, both of those things can be true. There's a there are a lot of people that are worried about their jobs and how this is going to play out and whether the future is any brighter than the present. And there are people put in charge whose job it is to be positive. Why don't you think Comcast shareholders are really reacting to this spinoff? The stock barely budged on the news. Well, it's good. They're going to spin this off. The shareholders aren't really going to wind up with anything that different than what they started with. They will have Comcast independent of the spinoff and the spinoff, right? So they'll have a little bit of both, and both of them will be able to pursue their own agendas. And so it's

marginally good, I think, if they're, if they had conflicting agendas, ones which the Capital allocation decisions were affected by any politics or any internal strife. So it's marginally positive to shareholders. But not much. You own the same things, but in a different package. The stock has barely budged in the past five years. But it has paid a dividend. In 2014, Comcast paid a dividend of 45 cents a share in 2024.

That's $1.24. They're trying to use their balance sheet to return capital to share. shareholders and sometimes mature companies returning capitals to shareholders can be wonderful stock investments. But is there anything about this company that gets you interested is a long-term stock investor? No, not me. There are those that are interested. If you're talking about Remainco, so you've got SpinCo, that's what's being spun off. And Remainco, what remains.

You know, it's been a well-run company. It's doing things with internet, with cable bundling that people will continue to use. And certainly the internet, there's some pricing power at the moment there. But I think that they are more looking like a utility than they used to. Yeah. I want to move on quickly to this micro-strategy story because, Bill, this is wild. So micro strategy, which is a Bitcoin holding company with a side of enterprise software, has announced that it will offer institutional investors the opportunity to buy convertible bonds.

It's zero percent interest. They're going to sell about $2.5 billion worth of these bonds. It's zero percent interest so it can buy Bitcoin. First of all, how do convertible bonds work? And is it common for these bonds to pay nothing in interest? When you think of bonds, you think about getting a little. you get a little paycheck until the company pays back the value of the bond? Well, it is not common to have zero percent interest. So, a bond is like a regular bond

in other cases and pays interest to bondholders. And on top of that, has the option for conversion of the bonds into stock under certain scenarios. And so you don't have to offer as high high yield rate. The bond, the coupon doesn't need to be as high because you've got this kicker of some equity conversion opportunities. Micro strategies, zero percent, there were conversion strategies and maybe there's a lot of fine print that you got to go through. So do your homework on this one, but it's, it's your, you're betting on the price of Bitcoin held by micro strategy somehow. making you money because the conversion opportunities on this one include dates out in

2028 and 2029 and micro strategy being able to convert into cash or a combination of cash and equity depending on its price and what it feels like doing. So buyer beware on this one. But there are many buyers today as there are for virtually anything that has the residue of Bitcoin upon it. So why not, instead of just the residue of Bitcoin, why not just buy the thing or even an ETF? I don't, like, I don't understand why an institutional investor would do the loop-de-loop of buying a convertible debt for micro strategy to go buy Bitcoin that they can then return

whenever kind of they feel like it instead of just buying Bitcoin. Well, I think you've raised a good point. I'm not going to come out and defend what they've done. Although Microstrategy has done this very effectively to date, there's also a way in which it operates as a hedge against the actual direct holding of micro strategy so you can offset it with the convertible bond and reduce your risk because, you know, micro strategy has such a volatile stock price that if you hold a lot of it, then you may want to hedge that with this.

So it's not something that explains itself on the first read, I would say. But as you point out, there is institutional interest. And I think part of it is the hedging strategies have made available through this. Much like watching Fight Club. It changes every time you watch it. I also want to do a quick note. It's not any time micro strategy wants. There are rules of when it can call back the bond.

Quote, subject to certain conditions on or after December 4th, 2026, micro strategy may redeem for cash all or any portion of the notes at a redemption price equal basically to the principal amount. I got to get that one right if I'm talking about dead securities. Anyway, Bill Barker, appreciate you being here. Glad to have you back. Thanks. Thanks for having me.

How about a REIT without a chief investment officer? That actually might be a good thing. Up next, Annen Chalk of Aulu hosts Matt Argusinger and Anthony Chavone for a scoreboard episode Breaking Down East Group Properties. Premium Motleyful members get access to all scoreboard episodes in the video library, but even if you're not a member, and by the way, you should be a member. It's a great way to get premium coverage of stocks and investment analysis. Anyway, if you're not a member, you can watch this one in full on YouTube. I'll include a link in the show notes. In a world full of noise, long-term thinking stands out.

On the Capital Ideas podcast, Capital Group leaders explore the decisions that matter most in investing, leadership, and life. It's a rare look inside a firm that's been helping people pursue their financial goals for more than 90 years. Listen to the Capital Ideas podcast from Capital Group, published by Capital Client Group, Inc. Welcome to latest Motley Fool Scoreboard. I'm on in Chalk of Allum. We've got longtime fools, Anthony Chavone, and Matt. Argersinger giving a 1 to 10 rating to the Sunbelt area focused industrial reed that I may or may not have thought made backpax. It's East Group Properties, ticker symbol EGP.

As always, we'll rate East Group Properties business, its management and its financials. We'll talk valuation. If there's timefuls, we play armchair CEO and we will top it on about 12 minutes or less, maybe even shorter. So let's get to it. Matt, how do you rate the strength of East Group's business, including factors like its industry and its competition? Scale of 1 to 10, 10 is invincible. One is hopeless. Well, on end, I'm going with eight pretty high for East Group properties.

As you mentioned, it's an industrial reet. It is mostly focused on the Sun Belt. Most of its properties, almost all of its properties are kind of shallow bay, distribution-oriented, think warehouses, logistics facilities, and what they call last-mile locations. So really strategic real estate, that's important for three big trends that I'm going to talk about, which one being the obvious one is e-commerce. We are living in a more and more e-commerce world, more and more retail sales of being driven, of course, by online sales. That fits perfectly into E-SRub strategy. The second big trend is, you said at Sunbelt, they derive about 70% of their operating income from states like Texas, Florida, Arizona, North Carolina.

these are among the fastest growing states in the country. It's where a lot of people are moving to, a lot of businesses are going to. That's a big tailwind for them. And then post-COVID, we've seen this really need for companies to really optimize their supply chains, have higher inventory ratios, practice what they call just-in-case inventory management. God, that's another big, huge tailwind for East Group properties. I would say the one reservation I have about East Group and why I don't give it nine or ten is they are among the smaller reits.

They are a large industrial region. but there's still less than a tenth of the size of Prologis, for example. It's still a highly fragmented market with lots of supply, and they're very development focused at East Group. So it's more capital-intensive than maybe other REITs. So that's why I'm giving an 8 out of 10. Yeah, I'll go with a seven for East Group's business. Matt, you mentioned a lot of the major things,

but another thing that I like about East Group is that about 50% of their portfolio has been developed internally. So I think that's really important because they can design the properties to their specifications. They can build them for the long term. And then the other thing I like about them, too, is that they have the most diversified tenant base out of, I think, any industrial REITs. Their top 10 tenants account for just about just under 8% of their total annualized base rent. So I think that's really important. And then aside from the e-commerce and migration trends that you mentioned earlier, I just think industrial real estate is an advantage property.

type. If you think about a warehouse, right, it's just four walls, you have a ceiling, you have a roof. There's not a lot of recurring capital expenditures involved with maintaining a warehouse. And that allows more cash to ultimately be returned to shareholders. And I'll only give it a seven because this business isn't a little bit reliant on outside forces that aren't necessarily within the company's control. So you think about like supply and demand fundamentals, the health of the economy and migration trends as well, although those have been positive recently, but I'll settle with a seven. Given it's smaller size, that diversification, Ant, that you were talking about really gives

me some comfort where it's not just relying on, you know, you won't want to see, 32% is from this one big tech company. Let's move on to management, Matt. Scale of one to 10. 10 is Warren Buffett, of course, and one is Homer Simpson. I might be a little high here, but I'm going nine out of 10 on end. And that's because I'm just really impressed by CEO Marshall Loeb and what he's, done. His tenure goes back to 1991 with Easter properties. He was with the company for the first 10 years

of his career. He went off to be an executive at a couple of other publicly traded reeds before rejoining East Group in 2015 and then becoming its CEO in January 2016. And since Lowe became CEO in January 2016, East Group has outperformed the S&P 500 by more than 80 percentage points. That's hard to do as a REIT, especially in recent years. Real estate has been in a pretty big bear market, yet E-Sgroup has continued to outperform and deliver amazing returns. And I'm going to steal a page from Ants Playbook here, but one of the great ways you can measure a REITs management is how they've grown the dividend versus the rest of the company. East Group has grown its dividend by about a 13% annualized rate over the last 10 years. Over that same span, East Group shares outstanding and total debt outstanding have both increased at just around 5% annually.

So the dividend growth is growing way ahead of those. critical capital parts of the company. I think that's a really strong sign of management. So I'm very impressed here. I'm also going to go high here at an eight. Matt, you mentioned Marshall Loeb, just been a tremendous CEO since he's been there. I also like looking at the proxy statement too for REITs because at the end of the day, they're allocating capital. And that's what we need to focus on as re-investors. And if you look at their compensation incentives, they're based on FFO per share. So per share metric, that's good based on same property, NOI growth. And then a couple of balance sheet metrics like debt to EBITA and fixed charge coverage ratios, as well as total

shareholder returns. So I think it's kind of rare for a REIT management team to be compensated on balance sheet metrics. So I think that's definitely a good sign. And then something unique about East Groups and Management team that you really don't see in any other REIT is that they don't have a chief investment officer. I find that fascinating. All the development, all the acquisition, all the disposition activity is decided by the the local teams that are operating those assets.

And I think that's good for talent development, too. Like Marshall Loeb was in charge of that at one point in his career at East Group. So I just kind of like how that East Group has a decentralized culture. The only reason I give him Nate is because of low insider ownership at only around 1.5% of shares outstanding. That tends to be fairly common for REITs just because the way they're structured. So I'll go with an eight. Right. Financials, Matt. A 10 is a fortress, a one is yikes.

I'm dishing out another nine here. I'm pretty, so just quick financial snapshot of East Group, looking at just their second quarter results, the most recent results. You know, the operating portfolio was 97% occupied as at the end of June. Rental rates, new and renewing leases, up 60%. That's an incredible, same property net income of 5%. Funds from operations, which is the key measure of a REIT's cash flow. That was up 8.5%.

I can't recall a quarter going back many years where East Group has not shown growth in funds from operations per share. So the business is performing really well. And if you look at the balance sheet, you've got debt to total market cap of just 16.9%. Debt to EBIT is less than 4x. Both of these metrics are very strong for REIT. And with interest rates had a lower now, East Group's balance sheet is only going to get de-risk and their liquidity is only going to get higher. So I just think they're in a really great position financially. Yeah, I'll go with an eight for the financials. Matt, you mentioned the FFFFR share growth, that the earnings growth.

That earnings growth has led the phenomenal dividend growth as well. East Group has paid a dividend for 179 consecutive quarters. They've also increased or maintained their dividend for 31 consecutive years, including increases in each of the last 13 years. So this is a steady dividend grower. You can see that cash that they generate flowing back to shareholders, which we love to see. in August, they increased their dividend by more than 10%. So that's a good sign.

And over the last 10 years, they've grown their dividend by just about 150%. So really impressive there. And Matt, you mentioned the strong balance sheet, too. Debt to EBITA is an all-time best for the company. Their debt to market cap below 20%. I mean, typically in the private real estate market, you'll typically see, like, loading the values closer to 60% or 70%. So this is a very, very well-capitalized company.

I only give them an eight because of their size, which you mentioned earlier, Matt. They're a little bit smaller. They can't necessarily get the best terms, the best interest rates on new debt that they issue, like somebody like a prologist can. So that's the only reason why I give them an eight, but definitely a strong company here. You can tell how much they like the company because they're both kind of apologizing when they give like an eight. Let's like valuation. How well will East Group stock do over the next five years and how safe is it?

Keeping in mind, a 10 is a short thing. One is a lottery ticket. Yeah, so over the last five, 10, 15, and 20 year periods, East Group has delivered a compound annual total return north of 10%. So I'm going to go between 10 and 15% annualized of the next five years. Today, if you look at its dividend yields at a yield of about 3%. It's growing its dividend at a 10% rate. So theoretically, that should produce a total return of around 13%.

So I think that's reasonable. And I mean, you factor in the tailwinds of e-commerce, some about migration, some of the rent growth that's already embedded in its below market leases that it has within its portfolio. I think that's going to lead to at least double-digit returns from here. I'm also going 10 to 15%. I'm a 7 in terms of my confidence with that. The valuation is a little high. If you look at what they're guiding for for FFO per share this year, it's, The stock right now is trading for around 22, 23 times that figure.

That's a little high, even though I think East Group does deserve a premium. As Ant mentioned, dividend yield is right around 3%. You add that to the dividend growth or to the FFO per share growth. Easy to see double-digit returns here. But valuation is a little high, so I'm not super confident in it, but I'll give it a seven for that. And I should say, I don't think I mentioned. I'm also going with the seven because of the valuation.

We're going to skip Armfare CEO in the interest of timing. go straight to everyone's favorite topic. I expect to hear Prologis somewhere in here. Anthony, is there a company in East Group Properties space that you like better? Yeah, there's this company called Prologis. That's my topic. Just a massive company. I think it has a market cap of over $100 billion, but I still don't think the market fully grasps just how strong this company really is with its management team, its balance sheet, just everything involved with the company. It's just phenomenal. I got to say Pelagis as well. And real estate size does make a huge difference for returns.

And as Aunt mentioned earlier, access to the capital markets. And so yeah, Prologis is the pick. I love East Group and I own Bologis. But if I had to pick one, I'd probably go to Pelagis. As always, people on the program may have interests in the stocks they talk about in the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motleyful editorial standards and are not approved by advertisers. The Motley Fool only picks products, but it would personally recommend to friends like you. I'm Ricky Malvey. Thanks for listening.

We'll be back tomorrow.