Goldman Sachs Updates Its Telecom Outlook: 'The Pipes Are Not Broken'

Goldman Sachs issued Thursday a slew of rating changes on media and telecom service stocks, including Verizon Communications Inc. VZ, Charter Communications Inc CHTR, DISH Network Corp DISH and Sirius XM Holdings Inc SIRI.

The Ratings

Goldman’s Brett Feldman upgraded Verizon and Charter from Neutral to Buy, with price targets raised from $51 to $56 and from $315 to $361, respectively.

Charter received a downgrade from Buy to Neutral with a price target cut from $63 to $39.

Finally, Feldman downgraded Sirius from Neutral to Sell, maintaining his $6 price target.

The Theses

Telecom stocks have notably underperformed the market this year, despite earnings coming in broadly in line with estimates during the first calendar quarter. Meanwhile, Wall Street has only modestly revised its projections in response.

“We believe that broad underperformance across the sector has been driven by a few key factors, including concerns about fundamental headwinds, M&A uncertainty and rising interest rates,” Feldman said in a note. “At a higher level, we believe the pursuit of vertically integrated business models by some operators has caused investors to question whether large cap stocks in the telecom and cable sector can outperform while the industry is undergoing such significant transformation.”

These concerns are overblown, the analyst believes — especially for Charter and Verizon. Both possess the three fundamental factors needed to grow: key network assets and capabilities, a large share of the market and strong financials to support investments, which is key as the industry moves to 5G.

Verizon is rumored to be seeking out media assets to acquire on the heels of AT&T Inc.’s T acquisition of Time Warner Inc TWX. Charter could seek out M&A deals as well.

Feldman sees limited opportunity for Dish to unlock the value of its spectrum assets over the next two years. And despite already estimating “minimal value” from the company’s satellite TV service, the analyst believes it will continue to constrain Dish’s ability to finance its wireless strategy.

Finally, Sirius simply seems overvalued. The stock’s 40-percent climb this year has significantly outpaced the market’s 4-percent rise. Additionally, the slowing pace of car sales and limited opportunity to raise prices could trigger profit taking if performance proves to be merely in-line.

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