A flurry of mega deal announcements late in the year didn’t help programming stocks that much in 2017, as the sector rose just 4.1% for the year, while distribution stocks, despite continued pressure from over-the-top competition, managed another year of double-digit percentage growth.
Despite an acceleration in pay TV subscriber losses in the third quarter – about 827,000, compared with 559,000 in the prior year – distribution stocks rose 12% for the year, fueled by strong growth at Charter Communications. Charter, the target of intense takeover speculation earlier in the year – none of those deals have come to fruition – rose 17% for the year, closing at $335.96 per share on Dec. 29.
That, coupled with steady growth at Comcast (16%), Liberty Global (17.2%) and Cable One (13%), offset declines at the two newest stocks in the sector. Altice USA, the domestic cable arm of European telecom giant Altice N.V., went public in May and fell about 35% by the end of the year, mainly dragged down by leverage concerns at the parent company. Overbuilder Wide Open West tapped the public markets in June, but dipped about 36% for the year, closing at $10.57 each on Dec. 29, as competitive concerns weighed on the stock.
Still, cable distributors gave back a big chunk of their gains earlier in the year when Comcast and Charter both reported subscriber losses in the third quarter. Comcast had warned investors that it would lose between 100,000 and 150,000 customers in Q3 due to Hurricane Harvey, as well as “competitive issues.” It ended up losing 125,000 video customers in the period, and broadband growth was slower than expected. Charter lost about 104,000 video customers in Q3 – more than twice its losses in the prior year.
Those losses affected the stocks – Comcast fell 7% in September after Comcast Cable EVP of XFinity Services Matt Strauss mentioned a shortfall was coming, and never quite recovered. If the year had ended on Sept. 6, Comcast would have finished up 19.2%. The same would have been true for Charter – its shares fell 8.3% on Oct. 26 when it announced Q3 results. The day before, Charter was on a pace to finish the year up 20%.
Distributor stocks rose nearly 40% in 2016, mainly on deal activity and speculation that more consolidation was to come. While 2017 wasn't the deal free-for-all that some may have expected, Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said changing investor attitudes and tax reform are driving shares.
“Investors are transitioning to more of a higher data monetization, wireless market share, still solid overall financial growth and increasingly large capital return strategies,” Wlodarczak said. “At the end of the day I think we are in the seventh inning of the transition for cable.”
Neither sector matched the growth of the so-called FANG stocks – Facebook, Amazon, Netflix and Google – which rose a combined 46.8% for the year. Amazon, which plans to spend about $6 billion on programming in the coming year, rose the most, rising 56% for the year from $749.87 to $1,169.47 each. Netflix was a close second, rising 55.1% from $123.80 to $191.96 each, while Facebook gained 53.4% from $115.05 to $176.46 per share. Google gained the least but still beat cable’s best, rising 35.5% from $771.82 each to $1,046.20 per share by year’s end.
The Walt Disney Co.’s Dec. 14 announcement of its plan to purchase core assets from 21st Century Fox was the cap for what had been a strong deal year in the programming sector. In July, Discovery Communications announced its long-awaited purchase of Scripps Networks Interactive in a transaction valued at about $14.6 billion.
But those deals were just barely enough to push the sector into the black for the year. Overall, programming stocks were up 4.1%, perhaps weighed down by uncertainties surrounding the other mega-deal in the sector, AT&T’s $108.7 billion purchase of Time Warner Inc.
AT&T had expected to close the Time Warner deal by the end of the year, and for most of 2017 looked to be on track to meet that goal. But as the year wore on, rumblings that the Department of Justice would look unfavorably on the deal began to grow, culminating in a DOJ lawsuit in November to block the deal on anti-trust terms. AT&T has vowed to fight the suit, and is scheduled to have its day in court in March.
Whatever the outcome, the roller-coaster approval process has played havoc with the stocks. AT&T shares were down 8.6% for the year, closing on Dec. 29 at $38.88 each. Time Warner’s decline was softer, dropping 5.2% to close at $91.47 on Dec. 29.