UBS Initiates Pay TV Sector Coverage

UBS Securities analysts John Hodulik and Matthieu Coppet initiated coverage of the cable and pay TV sectors Friday, slapping a “buy” rating on DirecTV Group and a “neutral” rating on Comcast, Time Warner Cable, Cablevision Systems and Dish Network.

In their report, Hodulik and Coppet were most optimistic about DirecTV, citing its leadership in the HDTV market with 89 HD channels and its focus on high-end customers. Both analysts believe that mounting economic pressures will lead to a rise in disconnection rates and bad debt in the pay TV market, but added that DirecTV targets “a high-end customer segment that is more rural and less exposed to competition. High HD penetration is driving ARPU gains and lower churn, leading to improving profitability.”

The two analysts were less enthusiastic about cable operators, adding that competitive pressures from telco and satellite, mounting subscriber losses, weak consumer spending and the slowing growth in new services additions continue to haunt the stocks.

Those issues, the analysts wrote, “will likely drive further downward revisions to consensus estimates, keeping a lid on the shares.”

At Dish Network, Hodulik and Coppet remain cautious for two reasons: the possibility of a buyout by AT&T and the satellite TV company’s focus on lower-end, price-conscious customers.

“We believe the share price over the next 12 months will be largely determined by whether AT&T bids for the company,” the two analysts wrote. “Given Dish’s lower-end customer base, we also expect the weakening U.S. economy to pressure fundamentals.”