After four relatively bullish years, Barclays has had it with cable TV. The company has downgraded the entire U.S. cable and satellite communication industry to neutral.
The downgrade was prompted in large part by Charter Communications backing off some of its more optimistic projections. In a research note, Barclays observes that “relative to the company's own estimate for 2017 EBITDA in its proxy, we estimate 2017 EBITDA is likely to come in ~$675mm short.”
Barclays is hardly alone. The stock trading site Live Trading News says that the overall opinion on Charter Communications is trending bearish.
Charter’s problems, according to Barclays, include double-digit growth in programming costs, wireless launch costs, and a reluctance to raise broadband prices. Barclays analysts also expect that Charter is going to have to start making the same sort of capital investments that Comcast made over the last few years. The firm downgraded Charter to UW, or underweight.
Barclays calls out Charter as a specific disappointment, but the firm clearly sees Charter as emblematic of the entire industry, which is subject also to a slowdown in broadband growth, competitive pressure in video, M&A permutations becoming more uncertain in terms of pay offs, and optimistic estimates and valuation.
Barclays said it has been assuming a relatively static competitive environment in video, which is hard to credit given the increase in over-the-top video sources and the cord-cutting and cord-never phenomena. Barclays has finally decided a static competitive environment is “likely a misplaced assumption.”
As for further merger and acquisition (M&A) activity, the company believes that pretty much all the value that can be wrung out of the sector already has.
They note that Comcast looks stronger than Charter in many respects, but if tax rates come down, Comcast will have the same cash flow growth as Charter, and that’s all Barclays need to remove Comcast from its Top Picks list.
All of it creates a lack of visibility for the entire industry that Barclays’ analysts say they are unhappy with. “[W]e believe the growing lack of visibility could result in further downside surprises in the coming quarters."