Analyst Explains Bearishness on Cable Network Stocks

Despite recent share price increases, ad and affiliate revenue trends are challenging, Nathanson says

While cable network stocks are rising, analyst Michael Nathanson of MoffettNathanson Research thinks they are heading for tough times and investors should stay away.

Nathanson’s new report is entitled “Why Are We Bearish on Pure-Play Cable Network Stocks?” and lays out the case he’s been making for months.

“We think the market is underestimating the growing challenges facing pure-play cable network companies,” he said, pointing to two distinct risks cable network companies will have to overcome in 2017 in order to grow earnings.

“For starters, national cable network advertising is barely growing,” Nathanson said. While broadcast networks posted gains, cable advertising was down 1% without the Olympics in 2016. The cable networks actually got a boost last year from a change in Nielsen’s procedures that added viewers in most cases.

“We think that 2017 will produce share ratings declines (similar to the Summer of 2014), which will pressure cable network ad growth,” Nathanson warned. "We expect cable networks focusing on live sports and news will take share from those focused on scripted, repeat or non-fiction content.”

On the distribution side, Nathanson says that the emergence of new digital over-the-top streaming carriers has reduced investors’ panic over cord cutters, but he adds that only some network owners really seem to be benefitting.

“We think the owners of broadcast networks and their affiliated cable networks will benefit from this trend while the owners of long-tail portfolios and nice programming will be hurt. This dichotomy is already seen across the first four OTT launches and we expect Hulu to be more of the same,” he said.

Nathanson already has sell recommendations out for AMC Networks, Discovery and Scripps Networks Interactive, and he rates Viacom as neutral.

(Photo via 401(K) 2012's FlickrImage taken on Feb. 21, 2017 and used per Creative Commons 2.0 license. The photo was cropped to fit 9x16 aspect ratio.)