Charter Communications has been returned to a “buy” rating by investment research firm MoffettNathanson, primarily due to benefits predicted from the Republican-led corporate tax rollback.
“Charter isn’t a significant cash taxpayer at the moment, and their interest burden will, for a time, exceed deductibility limits. But it would be a mistake to suggest that tax reform shouldn’t significantly benefit Charter’s valuation,” wrote analyst Craig Moffett in a note to investors this morning.
The firm downgraded the MSO to neutral last February, when speculation that Verizon might be the No. 2 cable operator in the U.S. sent Charter's share prices souring way past what MoffettNathanson felt was a true valuation.
What the firm believed was a correction occurred in September, when Comcast signaled that third-quarter growth rates would fall short of analyst expectations. That revelation not only resulted in sell-offs of Comcast, but the broader cable sector in general.
“Charter’s shares fell back with Comcast’s… but from a starting point that included so much M&A speculation that, even after the sell-off, Charter’s shares were still trading well above where they had started, while Comcast’s were some 20% lower,” Moffett explained.
The final piece of the puzzle, the analyst added, fell in last month with passage of a Republican-led bill that rolled back the corporate tax rate into the low 20% range.
It’s not as if Charter and the rest of the cable industry don’t have their challenges.
“Yes, the fundamental issues that beset the cable sector over the last four months of 2017—competition from OTT video, a slowing broadband market, and fears of competition from 5G wireless—are all still there (even if some of these, particularly the threat from 5G wireless, have arguably lessoned, as investors have learned more about millimeter wave technology)," the research firm said.
Meanwhile, MoffettNathanson said—probably wisely—that it will leave it to others to “debate as to whether tax reform will stimulate U.S. GDP growth, job growth, capital investment, and/or wage inflation.
“What tax reform will do,” Moffett added, “is make companies more valuable by allowing them to keep more of the cash they generate. That will be particularly in the case in industries where the benefit of tax reform (keeping more of the cash on generates) is less likely to be competed away in the form of consumer price discounts, promotions or higher input costs. Cable would seem to fit this description more than most.”