Moffett Downgrades Cable Sector on Title II Woes

Influential media analyst Craig Moffett, principal and senior analyst at MoffettNathanson, lowered his ratings on three top cable distribution stocks (Comcast, Time Warner Cable and Charter) to ‘neutral’ on Tuesday, citing the threat of price regulation tied to Title II reclassification of broadband and the increased possibility that regulators reject the Comcast-Time Warner Cable merger as hurdles that are too big to ignore.

Moffett has warned about the looming threat of pricing regulation with Title II for months, and though the stocks have stayed stable, perhaps in the thought that a Republican Congress will tamp down any pricing strictures, Moffett is not convinced.

“It would be naïve to suggest that the implication of Title II, particularly when viewed in the context of the FCC’s repeated findings that the broadband market is non-competitive, doesn’t introduce a real risk of price regulation,” Moffett wrote. “Not tomorrow, of course, so yes, near term numbers won’t change. But terminal growth rate assumptions need to be lowered. Multiples will have to come down.”

Moffett, who in the past gave the Comcast-TWC deal a 70-30 chance of winning approval, dropped those odds to 60-40 on Tuesday, citing increasingly negative sentiment in the press and federal moves to raise the minimum speed classification for broadband to 25 Megabits per second.

“Mostly, however, our downgrade is simply a matter of a sector that has priced in a awful lot of good news and very little bad,” Moffett wrote. “After a strong rally in the face of mounting headwinds, Comcast is now just 1% below our target prices, and Charter just 11%. We believe it is time to reduce exposure.”

Removing broadband pricing flexibility also could exacerbate other factors that are weighing on the indstry, he added.

"Worsening viewership and advertising trends are driving programmers to break ranks both with each other and with their legacy distributors," Moffett wrote. "In the past, changes to broadband pricing would have been the natural remedy. That avenue may be no longer open."

The stocks reacted tepidly to the downgrade, with Comcast closing at $58.80, down about 1.1% (67 cents each). Charter finished Feb. 17 down 0.8% ($1.43) to $176.45 and Time Warner Cable fell 1,4% ($2.06) to $147.68 each.