Cable Stocks Dip on Morgan Stanley Downgrade

Swinburne Drops Sector to ‘Cautious,” Citing Ad Revenue, Subscriber Pressures
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Morgan Stanley media analyst Ben Swinburne lowered his outlook on the cable sector to “cautious” from “outperform” Tuesday, citing advertising and ratings pressures, sending some stocks southward.

In a note to clients, Swinburne said the tailwinds of the media cycle of ad recovery and content monetization have faded, replaced by “painful fragmentation” in both pay TV subscribers and advertising share.

“We believe the next phase in the evolution of these generally well-run, high margin businesses will be a challenging period of falling returns,” Swinburne wrote. “The days of pushing through double-digit price increases on its distributors will come to an end. The growth in online video licensing, which has been staggering, has slowed and the related erosion of viewership will accelerate.”

Swinburne had already cut his ad market outlook in November. In his note Tuesday he added cable subscriber losses to the mix, estimating that cord cutters helped shave subscriber rolls by between 1 million and 2 million customers in 2014.

“We think this will continue as consumers face more choices and distributors face more pressure to adopt and make more aggressive carriage and packaging decisions,” Swinburne wrote.

The sector downgrade hit some stocks harder than others, but the pain seemed to be felt equally among programmers and distributors. Viacom, under pressure from low ratings and reeling from a Jan. 14 downgrade by Citigroup analyst Jason Bazinet, dipped as low as 4.8% ($3.28 each) in early trading to $64.79 per share, before rallying to close at $66.36 (down 2.5%); while Charter Communications fell as much as 3.5% ($5.61 each) to $155.50 earlier in the day before closing at $156.13 (down 3.1%). Time Warner Inc. dipped nearly 5% ($4.11 each) to $79.07 after Swinburne in a separate note downgraded the stock to “equal weight’ from “overweight,” but rallied somewhat to close at $80.35, down 3.4%. Rounding out the sector, Scripps Networks fell as much as 3.5% ($2.57 each) to $71 per share before closing at $71.74, down 2.5% and 21st Century Fox fell as much as 2.8% (99 cents each) earlier in the day but closed down 2.4% at $34.12 per share.

Three stocks managed slight gains for the day – DirecTV, was up 0.04% (3 cents) to $85.58 each; Liberty Global, up 0.3% (16 cents) to $46.56 per share and Starz, up 0.1% (3 cents) to $28.60 each.

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