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Bernstein Analyst Initiates Cable Coverage With Positive Outlook

Bernstein analyst Peter Supino launched coverage of seven cable, telco and satellite companies Wednesday with a positive outlook, adding that cable operators should enjoy mid-single digit revenue growth even as video customers decline.

Supino initiated coverage of Charter Communications (Outperform, $541 price target); Altice USA (Outperform, $38); T-Mobile (Outperforms, $103), Comcast (Market Perform, $50), Verizon (Market Perform, $63), AT&T (Market Perform, $36), and Dish Network (Under Perform, $29).

Supino noted in his detailed 84-page report that while Dish Network and the telcos have their own pressures to deal with, cable appears to be well positioned, based on strong broadband performance and prospects for commercial and mobile growth.

“With margins and [free cash flow] likely to improve and video less important to financial results, cable stocks enjoy multiple valuation tailwinds that offset the weight of the sector's high penetration levels,” Supino wrote.

He added that with capital expenditures expected to continue to decline, cash flow growth should be in the high-single digit percentages for cable operators.

The analyst introduced four investment themes to value the sector:

  • Focus on pricing: Although the market is increasingly saturated, Supino believes there are sustainable opportunities in pricing and industry structure.
  • Margins will be “stronger for longer” – Increased scale will continue to drive margins.
  • Fiber is the key – As data demands grow and 5G continues to be hampered by siting and backhaul needs, “dense fiber networks are precious.”
  • Video subscriber declines aren’t worth the worry: Supino believes that video losses “obscure otherwise rapid and durable cash flow growth.”

Cable stocks have been on a tear this year -- the sector was up about 50% for the first nine months of 2019 -- and are expected to continue on that pace. Supino appears to be equally optimistic -- his 12-month price targets on Charter, Altice, and Comcast represent a 10% to 30% premium of their closing prices on Oct. 15