It’s no secret that countless consumers have “cut the cord,” exiting cable TV’s 900-channel glut — that’s the actual figure, folks — and high monthly bills. And who wins? Aside from consumers, it’s a field day for cheap streaming services such as Netflix (ticker: NFLX) and Amazon.com (AMZN).
But for investors, does the mass exodus translate to saying sayonara to stocks with major stakes in the cable world?
The current state of affairs should give Comcast Corp. (CMCSA) and AT&T (T) plenty of cause to worry. While both stocks have slumped since the summer; that’s hardly the case for Netflix or Amazon. And the stats tell a sobering story: Between 2010 and 2013, cable subscriptions for major providers dropped 10 percent. Even if you include the wider pay TV net, Comcast and AT&T show all the sizzle of a lukewarm burger.
Assuming investors see occasion to buy while both businesses work to reinvent themselves, does one emerge as the clear victor? Are both losers? Is it a draw? In this installment of Stock Market Showdown, we examine how the two cable giants stack up on the investment front. And it’s a good thing you’re here: You can’t catch this kind of action on Channel 921-B.
Maybe Comcast is cutting the cord, too. Comcast CEO Brian Roberts may still be licking his wounds after a high-stakes merger with Time Warner Cable (TWC) went bust last spring. It was the latest in a series of plays that landed Comcast properties such as NBCUniversal (and, interestingly, AT&T Broadband in 2002).
Perhaps the Time Warner debacle was for the best. Pay TV proved a drag on the Comcast’s overall performance, with 48,000 lost subscribers in the third quarter of 2015. But Comcast’s ownership of NBCUniversal gives it a toehold in theme parks, which saw revenue climb by 14 percent in the third quarter. Meanwhile, Universal Studios produced a host of blockbuster films in 2015, including “Minions.”
And like AT&T, Comcast offers high-speed Internet — a shot in the arm for its earnings and a promising source of new customers. “Comcast delivers higher and faster connection speeds for most of its customers, providing a data link for Internet, TV and phone,” says David Harden, president and chief investment officer at Summit Global Investments.
Is DirecTV the wrong direction? Comcast may have much more to lose if cable goes the way of the buggy whip: It is the largest cable provider in the U.S. AT&T, meanwhile, is the nation’s largest cellular carrier, but it suffers from cable woes of another kind: Consumers are giving up landline telephones faster than you can say “iPhone.”
Meanwhile, investors are still scratching their heads — or banging them — over AT&T’s completed acquisition of satellite provider DirecTV in July for an astounding $48.5 billion. That made AT&T the world’s largest pay-TV provider, but it also raised questions about why the company didn’t shore up its struggling U-verse wireless franchise, which lost 92,000 customers in the third quarter of 2015. The DirecTV move also seemed counterintuitive given that Amazon, Netflix and Hulu have proven the overwhelming popularity of the streaming model.
But it’s hardly time to fire up a DirecTV dirge — not when AT&T boasts a market capitalization of $207 billion, 40 percent higher than Comcast’s $136 billion. “While there’s a lot of noise about cord-cutters and people streaming Netflix exclusively, there’s also a lot of cash still generated with the old model of paying for premium television,” says Victor J. Medina, registered investment advisor with Private Client Capital Group in Pennington, New Jersey.
Whose cord is it, anyway? You’d think a maverick like Netflix CEO Reed Hastings cut the cord long ago — but the truth is, he can’t. “In order to view Netflix or any other streaming service, you need to have a high bandwidth and reliable Internet connection,” says Mark Donnigan, vice president of sales and market development at Beamr, a video- and photo-sharing technology company. “At home, this Internet connection comes over the cable or wire, so you need a company such as Comcast or AT&T as your Internet service provider, even if you don’t use them as TV providers.”
Donnigan says to think of it this way: Comcast provides Internet services over its cable infrastructure, while AT&T uses its wired phone lines and DSL modems. So while cable TV may be in peril, the cable itself remains a substantial asset.
So does that mean Comcast and AT&T can rest on their fiber-optic laurels? Not exactly. Comcast has seen its Triple Play bundle run up against consumer friction as users in search high-speed Internet don’t necessarily want a zillion channels as part of the deal. As Harden notes, “Comcast is losing market share to competitors who are taking fiber and cable to new homes.”
Comcast: Roberts’ rules. Philadelphia is a tough city to love — its denizens often pride themselves on surliness — and Philly-based Comcast may well be the corporate standard bearer for that reputation. Its penchant for alienating its cable subscribers with poor customer service is more than just urban myth. Readers of the Consumerist website voted Comcast the “Worst Company in America” in 2014, the last year the poll was conducted.
Bad publicity never helps when cable customers are already filing out the door, and investors have another potential negative to consider: The Roberts family owns a third of Comcast. While the familial factor can guarantee strong, stable leadership, it also means that to a large extent, Brian Roberts and his clan call the shots.
And the winner is? For all of its investment in the pay TV world, and its failure to ratchet up U-verse’s wireless speeds, AT&T is at its heart a telecommunications company: That first “T” stands for “telephone.” (The second one stands for “telegraph”; maybe they’ll want to change that to “tablet” or something.) And on the whole, telecoms tend to be less volatile, especially one from the old guard.
“For 2016, we are more positive with respect to AT&T over Comcast,” says Harden, pointing out that the DirecTV purchase could redeem itself as investors see the ultimate result as increased media clout. “AT&T enjoys a large customer base and high profitability in mobile phones,” he adds.
“AT&T boasts a significantly higher price-to-earnings ratio compared to Comcast, indicating a higher expected earnings growth by investors or a greater degree of undervaluation,” says Steve Berg, chief financial officer of O.penVAPE and a former managing director at Wells Fargo and UBS. “It also has a high dividend yield of 5.63 percent compared to Comcast’s 1.81 percent.”
Yet under the leadership of the Roberts clan and despite the customer service headaches, Comcast has flourished: growing from a half-million dollar company in 1963 into a multinational powerhouse. Landing NBCUniversal proved a masterstroke, while the scuttled Time Warner merger was, if nothing else, a bold and ambitious play. Even if cable TV turns into a distant memory, Comcast has the moxie and muscle to power through.
So all in all, this Stock Market Smackdown ends in a draw. Medina sums it up best: “You won’t be adding a lot of risk to your portfolio if you invest in either or both of those companies.”
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Stock Market Showdown: Comcast vs. AT&T originally appeared on usnews.com
