How To Play The Cable Sell-Off, According To Buckingham

In a report published Friday, Buckingham Research Group analyst James Ratcliffe commented that Thursday's sell-off in cable stocks is "overdone" and offers investors an "attractive" entry point.

According to Ratcliffe, the U.S. pay TV industry lost 510,000 subscribers in a seasonally-weak second quarter, versus a loss of 277,000 subscribers in the same quarter a year ago. On the other hand, cable operators, particularly Comcast Corporation CMCSA and Time Warner Cable Inc TWC improved their performance year-over-year as the group likely lost only 279,000 subscribers after losing 508,000 subscribers a year ago.

The analyst noted that advertising represents a "small" portion of U.S. cable operator revenue as less than 5 percent of total revenue is derived from advertising. With that said, Comcast (through its ownership of NBCUniversal) is "somewhat more exposed" but even in its case, TV advertising makes up only 15 percent of its total revenue.

Related Link: Deutsche Bank's Big Cable TV Bet

Ratciliffe said that Liberty Global plc – Class A Ordinary Shares LBTYA saw its shares lose more than 3 percent on Thursday likely in sympathy with U.S. cable operators. However, the analyst pointed out that the decline was "unjustified" as the company's profitability is "much less dependent" on the traditional video business versus cable operators.

Cord Shaving, Over-The-Top Content Commentary

Ratcliffe also commented on "cord shaving" (rather than "cord cutting"), noting that it represents "a modest negative at worst" for distributors, as the lower revenue is largely, if not more than 100 percent, offset by lower affiliate fees. In fact, Verizon Communications Inc. VZ's custom TV package is more profitable on a gross profit basis than its traditional expanded basic offering.

Finally, Ratcliffe stated that the increased amount of over-the-top content boxes could prove to benefit distributors as it will create "negotiating benefits" for the traditional distributors when negotiating their affiliate fees.

Rating And Price Targets

Shares of Comcast remain Buy rated with an unchanged $70 price target.

Shares of Liberty Global remain Buy rated with an unchanged $65 price target.

Shares of Time Warner remain Neutral rated with an unchanged $187 price target.