Charter Communications, Comcast, Cable One, and Altice stock are lower after Wells Fargo analyst Steven Cahall forecasted higher costs and lower stock prices.
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Cable stocks are trading sharply lower Friday following a bearish call on the group by Wells Fargo analyst Steven Cahall. He sees the cable companies facing both growing competition from the telcos—and each other—and an increasing need to spend on network buildout. He thinks the result will be higher-than-expected costs, lower-than-expected free cash flow, a scramble for new subscribers—and lower stock prices.
Cahall cut his stance on Charter Communications (ticker: CHTR) by two notches, to Underweight from Overweight, dropped his rating on Cable One (CABO)—his favorite name in the group—to Equal Weight from Overweight, and trimmed his price targets on both Underweight-rated Comcast (CMCSA) and Equal Weight-rated Altice USA (ATUS) as well. He thinks the sector is “rolling over to a period of slowing growth and heightened competition,” in particular in broadband, and that the stocks could head considerably lower.
“The challenges ahead for the cable industry have not emerged suddenly, but we do think they’re suddenly at the fore,” Cahall writes in a research note. The analyst notes that broadband penetration for homes with household income above $25,000 is now above 100%, leaving just market-share gains and new household formation to drive net subscriber additions. He thinks broadband net-add growth will slow in 2022 and beyond, and that a period of lower profitability lies ahead.
Cahall also sees growing competition from telecom carriers as they build out their fiber networks and pass more households. He notes, for instance, that AT&T (T) has more than 40% overlap with Charter’s footprint and that “its aggressive fiber plans will not go unnoticed by customers and investors.” He thinks Charter will look to match the added competition with investments of its own, boosting capital intensity and reducing free cash flow.
Cahall says Altice shares—down nearly 50% for the year to date—offer “a scary look at how cable multiples can derate when this happens.” Fears that could happen to Charter spurred his double-downgrade on the stock. “While we think Charter will fare better than Altice,” he writes, “we still think a derating is ahead.” He chops his target price on Charter stock to $665 from $848. “We’re negative on cable, and Charter = cable, hence in our view, Underweight is the logical call for the industry’s biggest pure play name.”
For Comcast stock, Cahall cuts his target to $46 from $49. For Altice shares, his new target is $21, down from $34; and for Cable One stock, $2,100, from $2,400.
On Comcast, he sees capital intensity increasing. He notes that the company isn’t standing still while fiber and fixed wireless [5G] roll out, investing in its own network to improve services to existing customers and win new ones. But he says those improvements will come as a cost. He also cautions that video subscriber losses will “cannibalize” high-margin ad revenues. And he thinks the company will continue to grow investments in streaming, both hard costs for content for its Peacock service and foregone cash as more content is pulled in exclusively to its own platform. The analyst trims his free cash flow forecasts for the company to well below Street estimates for both 2022 and 2023.
In Friday trading, Charter stock is off 4.6% to $707.83, Comcast stock is down 3.5% to $55.42, Cable One stock is off 0.8% to $76.78, and Altice shares are off 2.4% to $18.79
Write to Eric J. Savitz at [email protected]
