'Convergence' Is Key: Credit Suisse Weighs In On The Telecom And Media Sector

Credit Suisse analyst Douglas Mitchelson on July 11 initiated coverage on a slew of telecom and media stocks A theme central to all of the ratings was “convergence” between the two sectors — which companies are well-positioned and how are they going about it.

Benzinga broke down the highlights.

Telecom: Wireless

• AT&T Inc. T initiated at Underperform, price target $29.
• Verizon Communications Inc. VZ initiated at Outperform, price target $58.

“AT&T has become the first Communications company to bring ‘Convergence’ in-house, owning leading businesses in connectivity, pay TV and media,” said Mitchelson in a note. But the analyst sees challenges ahead for the company.

The scaling and distribution risks faced by the company will be challenging and likely bring margins down for the foreseeable future, especially as 5G buildouts continue. AT&T’s balance sheet has already been levered to pursue inorganic growth and maintain its dividend, suggesting little room to use capital to improve low returns.

Both AT&T and Verizon will benefit from recent stabilization in the wireless space, but the latter appears better positioned to gain. Verizon’s early investments in 5G have proves less expensive than expected and should, at a minimum, not be a share loss event.

“Interestingly, Verizon having remained focused on its core wireless business now meaningfully differentiates it from AT&T as an investment vehicle,” said Mitchelson, noting that incoming-CEO Hans Vestberg is less likely to following AT&A’s footsteps in pursuing media M&A.

Telecom: Cable & Satellite

• Altice USA Inc ATUS initiated at Outperform, $21 price target.
• Charter Communications Inc CHTR initiated at Neutral, $294 price target.
• Comcast Corporation CMCSA initiated at Neutral, $36 price target.
• DISH Network Corp DISH initiated at Underperform, $30 price target.
• Sirius XM Holdings Inc SIRI initiated at Outperform, $8.50 price target.
• WideOpenWest Inc WOW initiated at Neutral, $10.50 price target.

Increased competition in video, broadband and voice, suggests the increasing importance of scale in the face of deteriorating revenue growth.

Altice is in the most competitive marketplace given its large overlap with Verizon’s FiOS, but is working to bolster its position by building out its fiber network.

WideOpenWest is on the smaller side of the industry, and will need to rebuild investor confidence after a disappointing 2017.

“WideOpenWest’s new CEO has reset expectations but will still need to demonstrate sustained operating stability,” said Mitchelson.

Dish Network is another company with a lot riding on the decisions of one person.

“The flaw, in our view, in the wireless spectrum value bull case for DISH is the presumption controlling shareholder Mr. Ergen is willing to sell and that he will settle for a rational price,” said Mitchelson.

Dish’s free cash flow is drying up, weakening its hand moving into 5G, and Ergen seems to place a “much higher value” on the company than buyers, making M&A unlikely.

M&A is also looking less likely for Charter with Vestberg at the helm of Verizon, the most-likely partner for telecom–media merger. Without a deal on the table, Charter is lacking a major catalyst to build a bullish narrative.

Comcast is still pursuing convergence along with new investments in wireless service, meaning investors can’t rely on capital returns to drive value. The company’s management is strong but must deal with maturing (and declining) broadband and voice markets.

Sirius, meanwhile, is somewhat insulted from other activity in the sector. Mitchelson likes the company’s incredibly strong free cash flow and clear growth runway thanks to stable auto sales. The company is also a pursuing a large buyback program that will move shares higher.

Media

• CBS Corporation CBS initiated at Outperform, $66 price target.
• Walt Disney Co DIS initiated at Neutral, $114 price target.
• Discovery Communications Inc. DISCA initiated at Neutral, $30 price target.
• Twenty-First Century Fox Inc FOXA initiated at Outperform, $57 price target.
• Netflix, Inc. NFLX assumed coverage, upgraded to Outperform, $500 price target.
• Viacom, Inc. VIAVIAB initiated at Neutral, $33 price target.

Following the breakdown of a CBS-Viacom merger, both companies near-term prospects are hard to discern, though CBS’ outlook it a little brighter.

Investors are expecting healthy earnings growth from CBS for the next few years, and M&A opportunities are still present thanks to the AT&T–Time Warner deal. Viacom, on the other hand, is unlikely to see any success on that front so long as the Redstone’s retain control.

Fox’s fate is also tied up in M&A. The current highest bid for most of its assets is from Disney for $38/share and an equal amount of Disney stock. Even at that valuation, Mitchelson “see[s] the potential for bidding amongst Disney and Comcast to continue, and assume[s] another $5/share of value will be derived from a higher bid.”

Even if Disney loses the bid, it is widely considered the strongest traditional media company thanks to its diverse holdings of prominent brands. On the bearish side, Mitchelson believes Wall Street has not fully understood how expensive Disney’s push into streaming will be.

Netflix, the undeniable leader in the streaming space, is expected to continue enjoying that advantage even as Disney launches its service — similar to how HBO, the first premium pay TV service — has never truly been challenged.

Finally, Discovery may lack the scale needed to compete against distributors as pay TV profits move to streaming. The company has its own strong brands, but non-fiction programming does no drive online subscriptions the same way content from Disney can.

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