Two new reports from top Wall Street research firms both offer a surprisingly positive outlook on the cable sector, singling out the likes of Comcast, Charter Communications and Time Warner Cable as operators best positioned to take advantage of the upheaval in the pay-TV sector.
"Cable isn't just holding its own, it is dramatically improving in video even as the sector has trended down," wrote Craig Moffett of MoffettNathanson. "Admittedly, some of this is undoubtedly due to promotional activity -- Comcast and Time Warner Cable were aggressive in Q2 while DirecTV, AT&T and Verizon were not -- but part of this owes to the growing technological advantage of cable's two-way plant (for VOD) and cable's bundling advantage with broadband. Satellite in particular is beginning to struggle. Satellite's natural broadband peering is legacy DSL, which is fading fast, leaving DirecTV and Dish Network awkwardly stranded."
In his report, Moffett upgraded the cable sector from "neutral weight" to "overweight," and upgraded his opinion of both Comcast and Charter.
Moffett's newly positive opinion on the space is notable considering he has, in recent months, warned of the cord-cutting trend and its possible effects on the pay-TV space in general and cable specifically. Those concerns were somewhat underscored by the pay-TV performance in the second quarter: Cable, satellite and telco operators lost a total of around 625,000 subscribers in the second quarter -- the biggest quarterly loss ever reported for the sector, according to SNL Kagan. However, much of that loss was attributable to satellite operators like Dish Network and DirecTV and telco providers like Verizon and AT&T.
Cable operators, on the other hand, posted improving pay-TV numbers as well as gains in broadband customers. SNL Kagan reported that cable companies added 608,000 high speed data (HSD) customers in the second quarter. The gains were cable's biggest in the second quarter since 2008.
"Although we acknowledge that there could certainly be additional downside to subscriber numbers, through increased cord cutting and adoption of OTT substitutes, we think that the risks are relatively low for now, particularly to cable, given its ability to leverage its competitive broadband product as a lever," Moffett said.
A similar report from Wells Fargo analyst Marci Ryvicker reached similar conclusions, noting that the investment tide is turning from big media companies that deliver content and toward the companies that provide networks and distribution.
"After going through one of the worst earnings seasons we have ever had outside of the Great Recession, it's time to re-assess our entire coverage universe as clearly both fundamentals and sentiment have changed," Ryvicker said, according to a number of reports. "We can't help but think some level of value is transferring from content to distribution."
Ryvicker specifically downgraded Well Fargo's outlook on Diversified Media and moved to the sidelines on CBS, Disney and Fox. Ryvicker offered a positive outlook on the likes of Dish Network, Comcast, Charter and TWC. "What seems to have really shaken the market is the fact that we are FINALLY seeing the fraying of the television ecosystem in affiliate fees -- which is just tough, as subscription revenue is supposed to be the most stable and the highest margin of any media-type revenue stream," Ryvicker said.
Interestingly, Ryvicker predicted that live broadcasts would eventually be included in skinny bundles from pay-TV providers, but that sports programming would not.
Broadcast, cable channels see 3% drop in summer viewers; pay-TV penetration declines slightly to 85%
Analyst: 'ESPN not ready to go direct-to-consumer any time soon'
CBS' research guru David Poltrack: More people are watching TV than a decade ago
Pay-TV's Q2 was worst ever with 625K lost subscribers, says SNL Kagan tally