Cable distribution stocks overcame a scare earlier in the year — when the initial pangs of the pandemic drove shares down by double-digits — to finish 2020 up by more than 45%, while content stocks slipped as investors continued to weigh the impact of shifting to a streaming model.
Comcast, Charter Communications, Cable One and Altice USA all reported strong gains for the year. With just eight days left in the year, barring a meltdown of epic proportions, the sector will finish up 45.1%, lower than its 78% gain in 2019, but a healthy rise considering the pressures of COVID-19 and an uncertain economic outlook earlier in the year.
Cable One again led the pack with a 50% rise in its share price — Charter was second with a 33.5% increase — but all four stocks in the sector showed healthy double-digit increases.
Comcast had the weakest performance of the distribution sector — 11.3% — but that was mainly because of its NBCUniversal content unit. Its cable division reported robust broadband growth. In Q3 it added 633,000 broadband customers, its biggest quarterly growth ever. Rounding out the admittedly short distributors list, Altice USA shares rose 32.1% for the year.
“The trajectory of the cable industry over the past year is a simpler narrative. Up,” wrote MoffettNathanson principal and senior analyst Craig Moffett in a note to clients.
The full-year increases mark a big change in sentiment for the sector from earlier in the year. In the early days of the pandemic distribution stocks were hit hard. Altice USA fell 35% and Comcast, Charter and Cable One were all down around 20% each in the first quarter, a result of an overall decline in the Dow Jones Industrial Average and fears the economy would tank as COVID-19 spread across the country.
Content stocks were also battered in Q1 with the sector down about 40% during that period. But unlike the distribution stocks — which rallied in the second half of the year — content companies, with the exception of The Walt Disney Co., continued to falter.
Strong broadband growth — Comcast, Altice USA, Cable One and Charter all reported robust quarterly high-speed data customer gains in Q2 and Q3 — helped drive the stock up in later months. Not including Cable One, which actually saw its stock price rise 10% in Q1, the rest of the sector dipped 12% between January and March. But from then on, distribution stocks went on a tear, rising a collective 50% between March and December. (Cable One was up 35% during that same period.
At the same time, content stocks that were not Disney continued to slide. Disney shares grew by 20% for the year — they rallied strong in the last three quarters of 2020 after a 33% Q1 decline — primarily on the back of its Disney Plus streaming service. Disney Plus has outperformed even the most optimistic expectations — it had 86.8 million global customers as of Dec. 10 and expects to have between 230 million and 260 million subscribers by 2024. Other content companies, most who unveiled aggressive streaming strategies earlier in the year — have yet to see the same effect.
ViacomCBS, which in June said it would launch an expanded version of its streaming service CBS All Access (renamed Paramount Plus) in 2021, saw its share price slip 14.3% for the year as investors appeared to be taking a wait and see attitude on the stock. An investor event to further detail those streaming plans is set for early next year. At Discovery, which unveiled a sweeping streaming strategy in December with its Discovery Plus product, the stock was down about 14% for the year.
Other content companies with less pronounced streaming products — Fox and AMC Networks — also felt the sting of a lower stock price, with Fox shares down 24.2% and AMC dipping about 14.6% for the year.
But cable operators, who were written off in prior years as pay TV subscriber rolls dwindled, found new life in their commitment to broadband service. While video subscribers are expected to continue to erode — Kagan, a unit of S&P Global Market Intelligence, has predicted pay TV will lose about 31.5 million customers by 2024 — broadband should continue to hum along, albeit at a slower pace.
In a research note. Moffett predicted that the four top publicly traded cable operators (Comcast, Charter, Altice USA and Cable One) will add a combined 4.6 million broadband customers in 2020 (a 56% spike over the prior year). That pace will slow to 3 million additions by 2024. But Moffett stressed that he continues to be bullish on cable.
Moffett noted that expansion plans by Charter and Comcast into the more rural part of their footprints, as well as Charter’s participation in the RDOF auction could help bolster broadband growth. Furthermore, rising profit margins and reduced capital intensity should help drive multiples for the stocks.
“In late 2019, we had argued that the market’s new heuristic will be to buy Cable at 9x and sell it at 12x,” Moffett wrote. “The COVID crisis only accelerated margin expansion, as more customers moved to self-installation and web-based self-service during the crisis. Even after two full years of upward revisions to margin estimates, the market consensus was too low in its forecasts for every one of the publicly traded cable operators in Q3.”
COVID-19 also helped accelerate the decline of video subscribers and the continued shift toward streaming services. While that is good news for pure-play distributors like Charter, Altice USA and Cable One, Comcast and AT&T, each with substantial content divisions, could see added pressure.
AT&T has essentially thrown in the towel on distribution — its DirecTV unit has lost more than 6 million customers over the past x years — in favor of its HBO Max streaming service. For Comcast, the issue is a little more esoteric.
Other analysts have called for Comcast to separate its distribution and content assets, either via a spin-off (more likely) or a sale (less likely). While Comcast has tried hard to show investors the value of its content units, declining affiliate fee revenue and a spotty ad market have added to the uncertainty. Comcast launched its own streaming service — Peacock — across the country on July 15 and as of Dec. 8 had 26 million customers.
While streaming and virtual MVPDs have begun to take hold as the pay TV vehicles of choice for many consumers, analysts have warned there is a danger that subscribers will cancel their subscriptions once they finish binge-watching the most popular shows or their favorite sports' seasons end. Moffett estimated that a subscriber base that only stays with a service for 9 months out of 12 is the equivalent of losing 25% of its overall customers.
“Again, this is a concern for media companies (yes, Comcast and AT&T) more than it is cable operators,” Moffett wrote. “Remember, the cable operators are infrastructure providers. As such, we’ve long argued that there are really only two risks to the Cable thesis: infrastructure-based competition to broadband, and regulatory risk.”
He added that infrastructure competition is mainly 5G offerings from wireless companies, which don’t appear to be an immediate threat. And regulatory concerns are minimal as well, with the main fear — a reclassification of broadband service to a Title II designation — increasingly unlikely.
“...[W]e concluded that not only was a Biden Administration nothing to fear, it might actually turn out to be a positive for Cable. We still feel that way,” Moffett wrote. “...Cable still looks attractive as we enter 2021… notwithstanding fears of a possible broadband slowdown.”
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