Cable distribution stocks were on a path to reverse their nearly 15% first quarter slide as June 30 approached, with the sector up a modest 4.5% through June 22, but got broadsided later in the month by fears that Comcast, the largest cable distributor in the country, would go on a buying spree. A week later, distribution stocks were up a collective 8%, nearly doubling the gains of the week prior, in part because tiny WideOpenWest agreed to sell off some systems in a pair of deals that in part highlighted just how wide the gap is between public trading multiples and a company’s actual value.
Comcast stock was on a tear as the second quarter neared a close, up 7% between March 31 and June 22, nearly double its 3.7% rise in Q1. But after news reports on June 23 hinted that Comcast chairman and CEO Brian Roberts may be considering deals to boost its position in the streaming video business, including a “tie-up” with ViacomCBS or an outright purchase of Roku, the stock sank nearly 5%. The fear that Comcast would spend heavily on a big purchase -- some analysts estimated that it would have to spend at least $75 billion on any potential Roku bid -- cast a pall on an industry that had been riding high on substantial gains in its broadband business.
Also Read: Brian Roberts Speaks, Sort Of
On the flip side of the coin, WideOpenWest stock has been on fire over the past six months -- rising 27.4% in Q1 and another 52.4% in Q2. At its close of $20.71 per share on June 30, the stock was up 94.1% from Dec. 31, when it closed at $10.67 per share.
Another stock that has performed strongly in the first half of the year was Dish Network, which despite pressure to build out its planned 5G wireless network by June 2023, was up 15.5% in Q2, building on a 12% gain in the first quarter. Dish is scheduled to launch its first market in Las Vegas in Q3. The satellite company launched a website -- Project Gene5is -- in June to let interested consumers know when the service will be coming to their town.
In the meantime, Comcast has slowly crawled back, especially since a handful of analysts came out with reports putting a damper on the likelihood of a big Comcast M&A deal. In the five trading days between June 23 and June 30, Comcast shares were up 2.3% to $56.78, not exactly their June 22 level of $57.63, but closer. The rest of the distribution sector, however, gained nearly 4% in that week of trading.
While WOW is too small to make a big dent in the overall prices in the sector -- distribution stocks were up 7.8% in Q2 without WOW -- they may have a bigger impact going forward, as investors start to look harder at the gap between public stock values and private trading multiples.
Nowhere is that more apparent than in the deal market. In the past year, two major cable systems deals have closed -- Stonepeak Infrastructure Partners $8.1 billion purchase of Astound Broadband and Cable One’s $2.2 billion purchase of Hargray Communications. Each of those deals were valued at 12.5 times forward-looking cash flow. Even WOW’s sale of systems in five markets to Astound and Atlantic Broadband in two separate transactions was valued at 11 times cash flow. In contrast, WOW’s stock has been trading at about 8 times cash flow, while bigger publicly traded operators like Comcast (10 times) aren’t faring much better.
In a research note Wednesday, B Riley Securities media analyst Daniel Day estimated WOW’s stock price would be between $33 and $34 per share if an 11 times multiple were applied.
“[W]e expect that this morning's announced transactions will be a positive catalyst by highlighting the share price discount to the private market value of the assets,” Day said of the stock price. .
In mid-June, distribution stocks had already erased the declines in Q1, as investors were still trying to figure out the impact of the pandemic on the overall business. Continued broadband growth in Q1 --- the numbers weren’t announced until late April and early May -- helped drive the stocks in Q2 -- Comcast stock, up 3.7% in Q1 gained another 6.3% by June 22, while Charter erased a 6.7% Q1 decine with a 12.7% gain in the same time frame. The same held true for Altice USA, which was down 14.4% in Q1 but managed to eke out a 4.4% rise by mid-June. Only Cable One, long the strongest performer in the sector, saw signs of levelling off, rising 1.6% in Q2 after a 17.8% decline in Q1.
Despite the Q2 rise, distribution stocks are still behind 2020, when pandemic-fueled broadband gains helped drive the stocks -- falling a collective 7.6% in the first six months of the year. Comcast and Charter are still ahead of their Dec. 31, 2020 levels -- Comcast is up 10% so far this year and Charter is up 9.1% -- but it was not enough to erase losses at Altice (down 9.3% for the year) and CableOne (down 13.9% since Dec. 31).
FBN Securities media analyst Robert Routh said while investors may fear Comcast spending too much for a programming or tech asset, it could boost multiples by taking a page from an earlier playbook -- swapping systems with other operators to create bigger and more efficient clusters.
It’s a take on former Tele-Communications Inc. president Leo J. Hindery Jr. 's “Summer of Love” in the late 1990s, when TCI swapped and bought systems all around the country in a flurry of deals to better focus the cable company’s operations.
Routh said a cursory look at a cable systems map could show potential swap candidates for Comcast, Charter and practically every other cable company. Regulatory fears would be virtually eliminated because in a swap, neither party gets bigger (or that much bigger), just more efficient.
“If Brian [Roberts] doesn’t want to do a deal on the content side, which I can understand at the moment, maybe it would make sense first to do some other deals with Charter and some other cable systems and get more contiguous clusters,” Routh said. “That would be a win-win, and should result in multiple expansion as we saw when it was done in the late 1990s.”
Still, even without a system swap spree, Routh believes cable stocks should rise in the second half of the year. And he sees trading multiples getting beefier as investors realize the value in systems.
“People are starting to realize that whether they like [cable broadband service] or not, I don’t know anybody who claims they don't need it,” Routh said. “...I do think we’re going to see multiple expansion as people realize that they [cable operators] are kind of unregulated utilities. They are necessary and even the wireless folks need them for the back hauling of the signal. That’s not going to go away. The question is, where do multiples go?”
For programming stocks, gains in the first quarter that were fueled by a combination of strong positive sentiment over streaming video offerings, and a bit of confusion, began to disappear in Q2. The overall sector rose 15.7% in Q1, goosed by a short-squeeze frenzy in February that swept up stocks like AMC Networks (up 48.6% in that period), Discovery (up 44.4% in Q1) and Fox (up 24.7% in Q1).
ViacomCBS was the other big Q1 gainer in the sector (up 21.4%) but that was more due to the launch of its much-anticipated Paramount Plus streaming service. By Q2, that confusion had waned, sending the sector into negative territory, fueled by declines at one company in particular -- Discovery Inc. -- that just happens to be involved in a mega-deal.
Discovery shares were up about 44% in Q1, in part riding the short-selling wave but also fueled by sentiment around the successful launch of its streaming direct-to-consumer offering, Discovery Plus. On May 17, Discovery and AT&T announced a $43 billion deal where AT&T would merge its WarnerMedia content business into a separate entity with Discovery. Almost immediately the stock began losing ground.
Discovery shares fell about 5% on May 17 and at its June 30 close, Discovery shares were priced at $30.68 each, down 14% from May 14. The stock was down about 29% for Q2. For the year, Discovery shares are up about 2% from their close of $30.09 on Dec. 31.
WarnerMedia parent AT&T’s shares were up 7.1% in Q1, but dipped about 3.3% in the second quarter. For the year, the stock is up about 3.6%.
Routh sees a rebound for programmers going forward, especially in the wake of Amazon’s agreement to purchase MGM studios for $8.5 billion.
“They’re all looking at what Amazon is doing,” Routh said. "I do think the tech giants are going to look at the content guys. I wouldn’t be surprised if you see bids made by some or all of them. The only downside is time.”
FANG stocks (Facebook, Apple, Netflix and Google) were up about 14% in Q2, led by Google parent Alphabet (up 22% in the period), Facebook (up 18.1%), Apple (up 12.3%) and Amazon (up 11.2%). Netflix was relatively flat (up 1.2%) as some investors continued to be worried about future growth opportunities and competition from rival streaming services. MoffettNathanson media analyst Michael Nathanson issued a report June 29 wondering whether Netflix may have to consider an ad-supported version or buying sports content to drive growth.
Facebook got a reprieve from some of the intense government scrutiny it has been under this year after a U.S. District Court Judge dismissed suits by the Federal Trade Commission and 46 states concerning the social media giant’s alleged monopolistic practices. While the FTC and the states can file an amended complaint -- and they are expected to -- Facebook stock, up 27.3% in the first half of the year, second only to Alphabet (up 43.1%), like the rest of the sector has been relatively unscathed.
