It’s been a tough decade for many cable TV providers, as increasing digital competition has forced the business to adapt. However, Deutsche Bank analyst Bryan Kraft believes that cable TV providers may finally be in a position to thrive.
In a new report, Kraft explains the reasoning behind Deutsche Bank’s bullish initiation on a handful of cable TV stocks.
Growth Drivers
Kraft sees broadband and business services as the key growth drivers for cable TV providers in terms of revenue and profits.
While he concedes that the industry is facing unprecedented competition in video and broadband, Kraft believes that cable providers are well-positioned to handle the pressure. The companies are now less dependent than ever on video for profits, and broadband competition is “geographically limited.”
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What About Cord-Cutting?
The thorn in the side of cable providers in recent years has been customer “cord-cutting” in response to not-traditional video competition from Netflix, Inc. NFLX, Amazon.com, Inc. AMZN and others.
“We estimate the variable profit contribution lost from a net video subscriber disconnecting was, on average, $20 in OpFCF/month in 2014; before taking into account additional revenue from customers paying more for broadband,” Kraft explained. However, Deutsche Bank is predicting that the impact of cord-cutting will decline to only $9 OpFCF/month by 2020.
Wildcard
The wildcard in the TV business right now is Apple Inc. AAPL. According to the report, Deutsche Bank believes that Apple will launch a pay TV service in 2016. While Kraft notes the difficulty in penetrating such a competitive market, Deutsche Bank is still modeling for 20 million Apple subscribers by the end of 2020.
Stock Picks
In the report, Deutsche Bank set Buy ratings for Charter Communications, Inc. CHTR, Time Warner Cable Inc TWC and Liberty Broadband Corp LBRDA.
Deutsche Bank initiated Hold ratings for Comcast Corporation CMCSA and Cablevision Systems Corporation CVC.
Disclosure: the author holds a short position in Amazon.
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