A report from analysts MoffettNathanson (MN) admits that while conventional wisdom would have it that telecom and cable should be defensive in a recession but generally speaking, those impacts will be far milder for most telecom and cable operators than for most companies.
Nevertheless, there have been some truly dramatic falls in share prices since February 20 (Charter -29 per cent, Comcast -22.5 per cent and Dish down a massive 54.3 per cent) and MN says that in the time since the coronavirus crisis triggered the first sell-off in stocks on February 21st, some have sold off more than the market, and some less, in ways that don’t seem to track their relative exposures.
MN says that key cable players, such as Comcast, have businesses that will be amongst the economy’s most stable. “To be sure, Comcast is a special case – 49 per cent of its revenue is non-cable, and much of that non-cable exposure (theme parks, a movie studio) is positioned in the crosshairs of the very hardest hit parts of the economy, and their Sky business is likely to be relatively cyclical, particularly if there are prolonged disruptions to Premier League soccer. But, again, Comcast’s cable business, like all cable businesses, should be among the economy’s most resilient,” says MN’s report.
But MN is worried over Dish Network; “Dish Network has fallen by far the most of any company in our coverage. And this one is easier to explain. The market’s appetite for big, expensive, and speculative projects has dried up,” says the report, and explaining that Dish has no choice other than to build its wireless network, and moreover the FCC rules say they cannot sell their spectrum before 2026.
“Many (most?) investors would agree that Dish’s satellite TV business is worth less than the $11 billion in debt held at the DISH DBS Corporation unit. That means that all of its equity value comes from its wireless business. The value of Dish’s equity should therefore be equal to the NPV of building a de novo wireless network. If you think building a new wireless network is a negative NPV project, then the equity is worth zero. Dish has fallen through our target price of $30, but we admitted that it was somewhat arbitrary when we initially set it. There’s no obvious floor. We’ll stick with our Sell rating,” advises MN.
“It looks to us that Charter and T-Mobile have been dramatically oversold relative to peers and relative to the market. Altice USA, too, looks exceedingly cheap. AT&T has arguably not fallen enough, again on a relative basis versus peers or the market as a whole,” says MN.