Barclays media analyst Kannan Venkateshwar lowered his rating on the cable sector to “neutral” on Monday, citing slowing broadband growth and heightened competition for video customers.
In a note to clients, Venkateshwar wrote that his positive view on the sector over the past four years has been supported by gains in video market share versus satellite providers, growth in broadband and mergers and acquisitions.
The market has had an equally bullish stance – Comcast and Charter Communications have outperformed the Standard & Poor’s Index by 52% since 2013. But that run could be coming to an end.
“Looking into 2018 and beyond however, we believe the cable story is likely to face increasing headwinds on account of growing competitive pressure in video, slowdown in broadband growth, levered balance sheets, M&A permutations becoming more uncertain in terms of pay offs, optimistic estimates and valuation,” Venkateshwar wrote.
The analyst was even more wary of Charter’s prospects, adding in his note that optimism for the stock has been largely based on growth expectations, share buybacks and M&A.
Barclays lowered its rating on Charter to “underweight,” mainly because its forward estimates have come down considerably in the past year, which Venkateshwar now says could result in cash flow coming in below expectations. That gap could widen in light of double-digit increases in programming costs, the expense of launching a wireless service next year and its reluctance to raise broadband prices. As far as M&A, Venkateshwar wrote that although speculation has helped fuel the stock, “most permutations that have been suggested appear to have challenging economics, especially given Charter’s potential ask.”
The stocks were largely unaffected. Comcast shares were up about 5% ($1.89) Monday to $40.32 each as talk that it is one of the companies still interested in purchasing some 21st Century Fox assets continued. Disney also reportedly restarted talks with Fox. Cable One was up 1% ($7.10) to $701.92 per share and Charter fell less than 1% to $334 each. Altice USA was down 0.4% (8 cents) to $18.37 per share.