While Comcast’s stock price has nearly tripled over the last five years, and Charter’s has nearly quadrupled, cable-bullish MoffettNathanson analyst Craig Moffett said there’s still plenty of room for the industry to grow in 2017.
“We believe there are three separate factors that argue in favor of further multiple expansion in 2017: Lower taxes, less regulation and lower capital intensity,” Moffett said in a note to investors today.
Of course, lower tax rates under the far-right Trump administration would benefit most American businesses in the short term. But a “domestically-based high tax-payer” like Comcast, Moffett estimated, would see its share price spike by 21.4% if the current tax rate of around 38% was cut to 15%.
Meanwhile, removal of regulatory burdens like Title II will also bolster cable operators, the analyst said.
“We have long believed that the most cogent bear argument for cable stocks is that broadband prices will eventually be regulated,” Moffett said. At its heart, that’s what Title II reclassification was all about.
“Under a Republican FCC and a deregulatory administration,” he added, “the reversal of Title II reclassification is a matter of when, not if. The sitting Republican members of the FCC (Commissioners Pai and O’Rielly, both of whom will remain) were adamantly opposed to reclassification in the first place, and both have already singled its reversal as a priority. More likely still is that the Republican Congress, which had previously proposed legislation to reverse Title II only to be blocked twice by the threat of an Obama veto, will now step forward with a legislative fix.”
The third “tailwind” favoring the cable industry in 2017, Moffett argued, is lower capital intensity, a result of operators like Cable One ceding the video business to OTT insurgents.
“We’ve written extensively about OTT video and the risk posed by cord-cutting (we’ll come to that in a moment). If there is a silver lining to this that is often overlooked, it is that as video subscribership falls, capital intensity falls with it,” Moffett said. “Indeed, even if video subscribership doesn’t fall, the rise of OTT video is in part a repudiation of the set-top box model. We believe an increase in the percentage of customers taking video in an apps-based format will inevitably rise. And with it, capital spending on set-top boxes will decline.”