While telecom companies, notably AT&T, have declared the Republican-led corporate tax giveaway as a massive opportunity for major network reinvestment, MoffettNathanson analyst Craig Moffett describes the economics as a bit more complicated than that.
But it’s not too early to declare winners and losers, he said.
“The magnitude of the benefit varies quite significantly from company to company,” Moffett noted in a memo to investors today. “In cable, tax reform will initially disproportionately benefit Comcast over Charter, but longer term, Charter more than Comcast. At Dish Network, spectrum amortization already creates a tax shield that will now be offset by capped interest deductibility, leading to lower cash flows under the new tax bill.”
Companies that are more highly leveraged, such as Charter, he said, “would benefit less than less levered ones (Comcast), at least initially.”
But higher warranted multiples “would mean amplified returns for equity holders of more levered companies (again, Charter),” Moffett added.
Only one telecom company covered by MoffettNathanson would actually be hurt by the Republican-led reform, which will ultimately result in a $1 trillion hit to the federal deficit, according to estimates.
“At Dish, spectrum amortization already creates a tax shield that would, under the proposed rules, be offset by the capped interest deductibility, leading to lower cash flows under the new tax bill,” Moffett said.
The analyst also noted that one larger cable company, Altice USA, would see negligible impact.
“For Altice USA, a significant net operating loss from Cablevision has resulted in very low cash taxes, but exceeding the interest deductibility cap will now give Altice USA higher taxable income, but the new impact to free cash flow is still accretive."
Speaking more broadly about the telecom sector, Moffett describes AT&T as a big winner, too, amid the GOP’s wealth-shifting bonanza.
And for their part, AT&T continues to beat the trickle-down drum, with CFO John Stephens pledging at the UBS media conference this week that tax reform will fuel new growth and demand for strategic business services.
“Business fixed investments have been pretty slow over the past few years,” Stephens said. “We expect that with the passage of tax reform, business fixed investments will step up and the demand for strategic business share will grow.”