A bullish cable turns neutral on equities. Here’s why.

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Comcast and Charter shares have jumped in recent years. But Raymond James analyst Frank Louthan has slashed his purchase ratings in the face of looming competition from telecom operators.

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Another day, another round of cable stock downgrades by Wall Street analysts. Actions of


Comcast
,


Communication of the Charter
,

and


Altice United States

had been riding a wave of growth in broadband Internet subscribers for most of the past half-decade, worsening year after year and handily beating the market. But in recent times, investors and analysts have become increasingly concerned about short-term subscription trends and longer-term competitive and regulatory unknowns facing the industry as a whole. Cable inventories have fallen significantly since the end of the summer, but remain at higher valuations relative to the market.

The latest analyst downgrades on Monday came from Raymond analyst James Frank Louthan, who downgraded his ratings on Comcast (ticker: CMCSA) and Charter (CHTR) stocks to the equivalent of Hold, against the equivalent of Buy. It also lowered its price target on Cable One (CABO), while keeping its rating at the equivalent of Buy.

Louthan’s downgrades follow changes from Wells Fargo’s Steven Cahall on Friday, who reduced Charter to Underweight from Overweight, and Cable One to Equal Weight from Overweight. Cahall also lowered his price targets for Comcast and Altice (ATUS) stocks, which he continues to value to Underweight and Equal Weight, respectively. Raymond James’ Louthan also rates Altice at the equivalent of Hold.

Behind the two analysts’ growing pessimism about cable stocks is the idea that competition is likely to intensify in the years to come, as providers move to networks based on fiber cables. optics from older technologies. It’s a capital-intensive process, and traditional cable giants like Comcast and Charter aren’t the only ones investing in it.


AT&T

(T),


Border communications

(FYBR), and


Light technologies

(LUMN) are among the relative upstarts focused on significantly expanding their fiber optic networks in the coming years to reach more homes and businesses. It’s more competition for incumbents where the networks overlap.

Telecom companies tend to have high fixed costs (it takes a lot of money and effort to build and operate a national or regional network), but low variable costs for each subscriber (providing internet service to a customer additional on an existing network costs little marginal cost).

This gives companies a high degree of operating leverage, which means that every dollar of additional revenue leads to a proportionately larger increase in profits, which in turn increases profit margins. Cable companies can spread the fixed cost of the network over a larger number of subscribers.

This momentum has been a positive wind for cable companies and stocks in recent years. The faster broadband Internet services of Comcast’s Xfinity or Chater’s Spectrum took market share from the DSL services of traditional landline operators. Income increased and profits grew even faster. Meanwhile, weak competition in most markets has resulted in consistent price increases for many existing customers.

“We believe that is about to change,” Louthan wrote on Monday. “As always, the pace of change is slow, but telecommunications operators have a significant number of fiber optic overbuilding projects taking place over a period of several years, and the competitive landscape is shifting in their favor as a result.”

He expects traditional telecommunications carriers to add 45 million locations to their fiber optic networks over the next three to five years, roughly doubling their current footprint. Louthan estimates that incumbent cable operators could lose around 15% of their total subscriber base as new fiber-based competitors gain market share.

“Just as cable companies have adopted a slow and deliberate pace of growth and expansion, we believe that this constant expansion and commercialization of new fiber-based homes…[resulting] losing shares to dominant cable companies, ”Louthan wrote.

Louthan also sees the Federal Communications Commission playing a more active role. Senate confirmation hearings for a fifth commissioner and the appointment of a permanent president will draw more attention to the agency later this year. Price caps, net neutrality regulations and other sensitive issues will become a more important part of the discussion under the Biden administration.

“When it does happen, we don’t expect the price regulation to be as draconian as a national tariff of $ 49.99 or something like that, but we do expect a wider expansion of eligibility for the. scheme for low-income people, additional grants… and a much more in-depth review of competitive practices, ”Louthan wrote.

Overall, Louthan sees the end of the Goldilocks environment that had made cable stocks the winners in recent years.

Comcast stock was down about 3% on Monday afternoon, after falling 4.7% on Friday. Charter stock was down 1% on Monday, after losing 4.8% on Friday, and Altice traded around breakeven on Monday, following a 4% loss on Friday.

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