With investor sentiment turning more negative on the TV business, analysts are shifting their recommendations towards cable companies and away from programmers.
“We did a complete overhaul of our coverage to determine where we would like to be positioned for the foreseeable future,” said Marci Ryvicker of Wells Fargo in a note Monday. “After checking in with our companies and private contacts, assessing the ad environment and taking another look at relative compares (enterprise value/EBITDA) both across and within our sectors, we really like cable—and Comcast in particular.”
Also in a note Monday, Benjamin Swinburne of Morgan Stanley reiterated his preference for the cable and satellite industry versus media.
Swinburne raised Morgan Stanley’s target price for Charter Communications to $300 in its base case and $380 in its most bullish scenario.
“We continue to believe there is value creation ahead for Charter by executing its strategy on its newly acquired footprint,” Swinburne said of the cable company, which is digesting its purchase of Time Warner Cable.
Swinburne sees Charter’s efforts coming in three phases over the next three years.
In Phase 1, there will be elevated churn among Time Warner cable subscribers coming off promotional pricing.
In Phase 2, Charter will resume converting Time Warner Cable distribution to all digital, completing the project by the end of 2018. This will mean higher capital spending but will enable Charter to deploy two-way set-top boxes, VOD and an advanced user interface.
In Phase 3, Charter's investments will roll off, and its average revenue per user will accelerate. “We see an inflection in free cash flow growth beginning in 2018-19,” Swinburne said.
Ryvicker says that cable should do particularly well in a spotty ad environment. “From what we can tell, there seems to be some post-Olympic malaise, as well as the two-fer we’re getting from the election with Trump not spending and traditional advertisers still on the sidelines given relatively high ad rates,” she said, adding “before you go shorting all of the broadcast stocks, there are still several weeks left in the quarter, so trends can change.”
She notes that Trump has just raised $90 million and that some broadcasters are not seeing softness in their markets.
Among the cable stocks, Ryvicker likes Comcast, despite some concern over the ratings for the Olympics. She notes that NBCUniversal accounts for only 27% of Comcast’s total earnings. And she notes that “Comcast still has the best trends in all of pay-TV with Q2 subs down only 4,000. It’s a market share gainer.”
Ryvicker also had nice things to say about CBS and Nexstar. CBS should get some cash from Hulu, as well as from its own OTT products. Nexstar’s political revenue trends seem better than peers. And the pricing for the notes it is using to buy Media General were strong, which means its debt payments could be lower than expected.