Opinions expressed in this piece are solely those of the author and do not represent the views of SNL Kagan.
The cable TV industry is doing better than you might think, according to senior analyst Davis Hebert of Wells Fargo High Yield.
His cable TV overview is part of a newly published, comprehensive corporate credit outlook report on 31 industries in 10 broad sectors covered by Wells Fargo high-yield bond analysts.
While the equity market tends to focus on growth and upside, the high-yield market is a barometer of risk. Thus, I think high-yield investors offer a unique perspective on suspect sectors such as cable TV in which equity market pundits may harbor a more negative bias due to escalating broadband and mobile competition.
Hebert has an overall "market weight" rating on cable because he thinks it will perform in line with the overall high-yield market's projected 5.3% total return in 2017. That's the base case. The bear case is for the high-yield market to generate negative 9.7% while the bull scenario is for a positive 7.3% total return.
Granted, the spread suggests a very polarized view of the high-yield market ahead in what will likely be a rising interest-rate environment.
Year-to-date, the Wells Fargo cable TV index has underperformed the high-yield market in both yield and total return. In 2015, cable TV underperformed on yield but outperformed the high-yield market's negative total return.
Here are some key takeaways from Hebert's outlook for cable TV:
Positives include continued growth in paid subscription units driven by broadband and enterprise services, plus incremental new economics from fiber-to-the-tower, on-demand and home security. Cable also offers best-in-class broadband speeds and can command tiered data pricing via its advantage as a "last mile" provider. Thus, older revenue streams with low-single-digit growth potential are being supplemented with newer, higher-margin revenue streams such as enterprise with double-digit-growth prospects.
Negatives include modest losses (about 1%-2% per quarter) of lower-margin basic video customers, elevated competition from satellite, telco and over-the-top providers, plus over-the-air local TV channels. Rising programming costs at high-single-digit rates are also a challenge via cable-network pricing, retransmission fees to TV stations and the overall increasing cost for sports rights. Higher costs for content are not an exclusive cable problem; it impacts all content distributors including satellite, telco and broadband.
M&A has been a primary driver of total returns for the past several years as the cable space has consolidated. In general, cable TV mergers have a good track record for smooth and relatively fast integration of services. Hebert foresees more consolidation ahead via strategic deals of distribution with content. His assumption is that the pending AT&T Inc. and Time Warner Inc. merger will be approved which would, in turn, spur similar deals.
Deregulation is likely in a new Trump FCC, which would be positive in general for cable TV. Specifically, economic constraining rules on Title II-driven net neutrality and proposals on set-top box reform and business data services would likely be rolled back, which would free up cable operators to be more aggressive on pricing.
As for competition, cable TV seems to be making a strategic pivot from trying to unsuccessfully block the penetration of over-the-top streamers with TV Everywhere. Instead, cable TV is now embracing broadband streamers via tiered-pricing options plus lower-cost faster broadband service.
Financial expectations include cable's ability to capture synergies and reduce M&A-induced debt-leverage spikes. Hebert anticipates cable TV revenue and EBITDA to grow at low- to mid-single digit rates via more broadband and enterprise services plus enhanced bundling.
Debt leverage will likely stay in a range of 4.0x to 5.0x EBITDA for publicly traded operators and 6.0x to 6.5x for private-equity operators. Capital formation will continue at a relatively low cost from institutional lenders and investors.
'Tis the season for the vision thing. I am crafting one on Wells Fargo's outlook for telecom and wireless that I plan to share with you soon through this blog.
