Traditional cable distribution stocks, once thought to be dead in the water as over-the-top players continued to erode their video customer base, came to life in the first half of 2019, as investors focused on broadband growth, driving the sector up by 40% in the period.
That’s a big turnaround from last year, when distribution stocks as a whole fell 5% during the period between Dec. 29, 2017 and June 19, 2018. The biggest factor in that reversal of fortune appears to be a combination of a change of attitude for investors, coupled with the continued strength of cable broadband service.
Altice USA, poised to launch its wireless service later this year, led the sector with a 45.6% rise in its stock price from $16.52 on Dec. 31 to $24.06 on June 19. Cable One, the Phoenix-based operator that changed its name to Sparklight in May to reflect its emphasis on broadband service, was a close second, rising 41.8% to $1,162.69 per share on June 19. The rest of the sector was up by double digits in the period, with Charter Communications up 39.6%, followed by Liberty Global (29.5%) and Comcast (26.7%).
Helping to fuel that growth was what appears to be a change of investor sentiment around the stocks. The first quarter was the worst ever in terms of cord-cutting — satellite TV companies took the biggest video customer hit, losing nearly 900,000 combined customers in the period, while cable companies lost a combined 366,000 video subscribers — but investors didn’t seem to worry. It’s all about connections.
Connectivity Is the Key
“Connectivity, that isn’t even close to dead,” FBN Securities analyst Robert Routh said in an interview. “Everybody needs it. They need WiFi, they need broadband, they need access to these OTT networks when they’re not on their cellphones. Because of that cable broadband growth has been what it’s been.”
Broadband growth across stocks in the cable distribution sector continued to be strong. Comcast added 375,000 high-speed internet customers in Q1, while Charter added 428,000, Altice USA added 36,900 and Cable One added 15,311. That momentum isn’t expected to shift anytime soon, according to Routh.
“Cable is still the best architecture for [broadband] and as a result demand for that product keeps going up,” Routh said. “Penetration is going up, churn is going down and there is no reason to think that will slow, ever.”
Investors are starting to realize that despite the trend toward OTT distribution, virtual MVPDs don’t work without a viable, reliable broadband connection. More often than not, that connection is through a cable company.
Large cable and telephone providers represent about 95% of the U.S. broadband market, according to Leichtman Research Group. In Q1, the top cable companies added 925,000 high-speed internet subscribers, a 109% increase over the prior year, and multiples above the 20,000 customers the major telcos gained in the period.
There are about 98.7 million broadband customers in the U.S., Leichtman estimated, with cable operators accounting for 65.3 million and telcos the remaining 33.4 million subscribers.
Routh said there might come a time when cable operators stop breaking out video, voice and data subscribers, instead disclosing connections only. Some operators are doing this to an extent — trying to push total customer relationships, rather than customers, for individual products. To some, the volatility of video only confuses investors.
“It causes the stocks to either stay within a narrow range or to whipsaw, where they go up one quarter when your subs show no [growth] or [some] growth in video, to a material down when you show a big loss in video,” Routh said of breaking out subscribers by product. “Because data is very consistent and telephony nobody cares about.”
Reporting overall connections could remove some of that confusion, he added.
“The reality is all that investors care about is how many homes you’re passing, how many are you connected to in some shape or form and what’s your average revenue per home,” Routh said. “They don’t care where the money is coming from.”
While distributor stocks were ablaze, the programming sector wasn’t quite as fiery, rising about 11.7% in the period as strong gains by large players were offset by sluggish performance at smaller content providers.
The Walt Disney Co., riding a huge wave of optimism after closing its $71.3 billion purchase of 21st Century Fox assets and mapping out details of its upcoming direct-to-consumer streaming offering, led the sector by rising 28.5% during the period to $140.92 per share on June 19.
Disney expects to launch its Disney+ streaming service in November at a $6.99 monthly price point, projecting at an Investor Day in April that between 60 million and 90 million customers globally would sign on to the service by 2024.
Disney’s decision to go full disclosure during that Investor Day — most analysts were at best expecting some vague subscriber data and no pricing information — helped lift the stock out of the doldrums.
“Bottom line: We got what we needed and we REALLY like what we heard,” Wolfe Research managing director Marci Ryvicker wrote in a note to clients about the April Investor Day.
Investors responded in kind. Disney stock hadn’t been able to consistently crack the $120-per-share threshold since the summer of 2015, when chairman and CEO Bob Iger revealed that its ESPN channel was experiencing some subscriber erosion, sending the sector into a four-year tailspin. Disney stock rose 11.5% on April 12 to $130.06 each, the day after the Investor Day, and has been up about 7% ever since.
Said Evercore ISI Group media analyst Vijay Jayant of the Disney Investor Day: “We came away encouraged by the sheer scale of the business model transformation that Disney has begun with the aim of becoming a leader in global internet TV. Clearly, the company has the brands, content and vision to make the strategy work — and we think the new ambitious long-term financial targets issued at the event, both on the revenue and cost sides of the equation, reflect the scope of the project now underway.”
Shares in Discovery Inc., which has been spending the better part of the year expanding its European sports lineup and landing deals with OTT providers, rose 23.3% in the first half. Viacom and CBS, fueled mainly by speculation that the two would finally recombine after more than a decade apart, saw their stocks rise by 18.6% and 13.8%, respectively.
Fox Corp., the entity left after 21st Century Fox sold most of its programming assets to Disney in March, has been pressured by what Routh said were investor concerns as to whether it would realize the cost synergies expected from the Disney deal, and whether management would implement a share-repurchase plan. Fox has said it expects between $300 million and $400 million in cost synergies and to generate about $2 billion in free cash flow annually after the Disney transaction.
“So what are you going to do with that cash?” Routh asked. “They haven’t done anything yet and people are questioning if they haven’t put a buyback in place and used it, why would I want to own it?”
The stock, as a result, is down about 6.8% since March 20, when Fox closed the Disney deal.
Routh and most other analysts expect Fox to rebound in the second half of the year and return to the high $30 or low $40 range by the end of the year.
Shaky Times for Smaller Nets
Smaller programmers have had a rougher go. AMC Networks was basically flat for the first half of the year (rising 1.9%). MSG Networks, which rode speculation that it could be a target of Sinclair Broadcast Group before Sinclair in late May reached a deal to buy 21 regional sports networks from Disney, was down by 9.1%.
World Wrestling Entertainment rose about 3% between Dec. 31 and June 19, as investors questioned the continued strength of its programming and its guidance for the first half of the year.
WWE’s sluggishness has more to do with investor expectations than performance, Routh said. It basically met its lowered guidance for the first quarter and should rebound in the fourth quarter.
Dish Network, down 28% in the first half of 2018, totally reversed that decline in the first half of this year, rising 55.8% between Dec. 31 and June 19. Fueling that growth was speculation that the satellite company would merge with DirecTV, or that it would purchase one of the expected castoffs of the T-Mobile-Sprint wireless merger, Boost Mobile. That deal was expected to be done as soon as last week, but no transaction had been announced at press time.
AT&T rose 13.6% during the period, after clearing the federal government’s second attempt to block its merger with Time Warner Inc. in February. Despite heavy losses at its satellite unit — DirecTV shed about 626,000 satellite-TV customers in Q1, while its OTT service, DirecTV Now, lost 83,000 in the quarter — the stock was buoyed by plans to launch a third OTT offering by the end of the year.
The FAANG stocks — Facebook, Amazon, Apple, Netflix and Google — all performed well in the period. The stocks were up a combined 21.5% in the first half of 2019, below the 34% growth they experienced in the prior year. Facebook, which has faced intense government scrutiny over its handling of customers’ personal data, saw its stock rise 43% in the first half, from $131.09 on Dec. 31 to $187.48 on June 19. Netflix was a close second, gaining 35.8% in the first half as it continued to dominate the SVOD landscape.
Amazon, up about 27% during the period, dipped its toes further in the content waters in the first half, partnering with the New York Yankees in that team’s purchase of regional sports network the YES Network. Apple, which was up 25% in the period, unveiled its Apple TV+ product in March to a somewhat tepid response. The service, which appeared to be light on compelling original content compared to its competition, is expected to be priced at $9.99 per month when it launches later in the year.
At least for the first six months of the year, though, cable distribution was the main story. And for Routh, that momentum should carry the stocks through the rest of the year and beyond.
“Everyone thinks distribution is going to do fine, they’re not worried about the value,” Routh said. “Content is a question. Unless you’re the size of Disney, how do you value it, how do you get comfortable? It’s that simple.”