Another day, another cable downgrade.
Raymond James analyst Frank Louthan V cut his ratings on shares of Comcast Corp. CMCSA, -3.56% and Charter Communications Inc. CHTR, -1.37% to market perform from outperform Monday, warning of increased competition and the potential for regulatory headwinds in the cable industry. The ratings changes come after Wells Fargo analyst Steven Cahall downgraded shares of Charter and Cable One Inc. CABO, -0.11% on Friday.
“We believe cable multiples will have a difficult time appreciating due to these two factors that are likely to weigh on the industry for some time, while the fiber transition for the telcos is a net positive over time,” he wrote. While change could come slowly, Louthan expects that “the increasing competitive issues impacting [subscriber numbers] will be a drag on the names.”
Comcast shares are off 3.1% in Monday trading, while Charter’s stock is down 0.9%.
Like Cahall, Louthan worries about looming competition from telecommunications companies that are making heavy investments in fiber buildouts. “As always, the rate of change is slow, but the telcos have a significant number of fiber overbuild projects that are going on over a multiyear period and the competitive landscape is shifting in their favor as a result,” he wrote.
By Louthan’s estimations, telecommunications companies currently have a collective 42 million fiber-based passings in the U.S., and he expects they could add 45 million more over the next three to five years.
“Just as the cable companies have taken a slow, deliberate pace to their growth and expansion, we believe this steady expansion and marketing of the new fiber-based homes will put increasing competitive pressure on the cable companies, as we believe the existence of a viable equivalent/superior product in these markets will result in share loss to the dominant cable providers,” he said in his note to clients.
Louthan also has concerns about potential future actions from the Federal Communications Commission. The FCC has the ability to implement price regulation without going through Congress, according to Louthan, and even though these actions may not go into place until late 2022 or so, they could weigh on cable multiples.
“When it arrives, we do not expect price regulation to be as Draconian as a national pricing tariff of $49.99 or anything like that, but we do expect broader expansion of low-income plan eligibility, additional subsidies as prescribed under the Cares Act, and much heavier scrutiny of competitive practices,” Louthan wrote. “We believe ‘affordability’ will be the political wrapper that will sell this tectonic shift in U.S. broadband policy.”
In addition to downgrading Comcast and Charter shares, Louthan cut his price target on outperform-rated Cable One to $2,000 from $2,236. While he has concerns about cable valuations more broadly, he noted that Cable One “remains the least broadband-penetrated,” giving the company “room to expand” even if the cable industry loses share.
In addition, fiber efforts from telecommunications players Lumen Technologies Inc. LUMN, -1.76% and AT&T Inc. T, -2.56% should be more targeted at “larger markets in their respective footprints than those markets typically covered by CableOne,” he wrote.
Cable One shares have declined 7.7% over the past three months, as Charter shares have slipped 4.9% and as Comcast shares have lost 8.5%. The S&P 500 SPX, -0.29% inched up 0.2% in that span.