Cord Cutting, Comcast Deal Risks Cause Cable Stock Downgrades

Craig Moffett lowers his estimate for the probability of approval of the cable giant’s Time Warner Cable acquisition to 60 percent and highlights the risks of Title II regulation.

MoffettNathanson analyst Craig Moffett on Tuesday cut his ratings on big cable sector stocks from “buy” to “neutral,” citing increased cord cutting risk, regulatory concerns about the planned Comcast acquisition of Time Warner Cable and a recent rally in stocks.

He cut his ratings on Comcast, TW Cable and Charter Communications and continues to have a “sell” rating on the stock of Cablevision Systems.

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“With the stocks having largely achieved our target prices, with cord cutting risks mounting and with regulation clouding the path forward in broadband, it seems to us to be time to reduce exposure” to cable stocks, Moffett wrote in a report.

Discussing the planned Comcast-TW Cable deal, the analyst lowered his estimated probability of regulatory approval from 70 percent to 60 percent. “We still believe the deal is more likely than not to be approved, but we are cutting our probability of approval (again),” he wrote, citing “stiffening political headwinds.”

Discussing cord cutting risks, Moffett cited “those pesky clouds gathering around the health of the pay TV ecosystem.” He added: “Worsening viewership and advertising trends are driving programmers to break ranks both with each other and with their legacy distributors.” In the past, content companies have always looked to protect the existing pay TV system, but now over-the-top, or online-only, services are popping up, he said.

The FCC has said it wants to use Title II of the Communications Act to regulate wired and wireless Internet to settle a long-running debate about net neutrality. Comcast said it supports an open Internet but not Title II regulation.

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On that Title II regulation, Moffett said he was “far less sanguine” than investors seem to have been. “At its core, Title II is about price regulation,” he said. “It would be naive to believe that the imposition of a regime that is fundamentally about price regulation, in an industry that the FCC has now repeatedly declared to be non-competitive, wouldn’t introduce risk to future pricing power.”

All that taken together shows that the recent run-up in cable stocks means investors have “priced in an awful lot of good news and very little bad,” Moffett concluded.

Email: Georg.Szalai@THR.com
Twitter: @georgszalai

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