UPDATED with closing stock price. AT&T’s stock ended its steady march higher Tuesday, dropping 4% after a respected Wall Street analyst downgraded the telecom and media giant’s shares and called its pay-TV unit a “cancer.”
In one of their biggest single-day stumbles of 2019, shares fell $1.61 to $38.02, their lowest level since mid-October. They had been gaining significant ground over the past couple of months, reaching a nearly two-year high of $39.61 as of Monday’s close of trading.
“Over much of the last year, AT&T’s stock price has climbed even as its fundamentals have deteriorated,” MoffettNathanson analyst Craig Moffett wrote in his downgrade note to clients. In lowering his rating on the company’s shares to “sell,” Moffett reaffirmed his 12-month price target of $30 a share.
Moffett, who has tracked the company and the pay-TV sector for decades, focused most of his criticism on the Entertainment Group, which includes DirecTV, U-verse and AT&T Now.
“A year ago, AT&T promised to deliver ‘EBITDA stability’ for the Entertainment Group in 2019,” Moffett wrote. “They have delivered on that promise… but at a horrific cost.” In order to reverse EBITDA declines, the analyst continued, AT&T raised prices and curtailed promotional discounts on video service. The company also took a hard line in several carriage negotiations with CBS, Nexstar and others, resulting in blackouts. And, Moffett contends, “they virtually shut down spending on new customer acquisition, further contributing to margin expansion.”
Taken together, these steps have “predictably driven subscriber declines dramatically higher. We think the chickens will come home to roost in 2020.” The company will likely begin 2020 with 15% fewer premium video subscribers than at the start of 2019, the analyst added. “The Entertainment
Group, in short, is a cancer,” he summed up.
At WarnerMedia, Moffett sees secular issues at Turner outweighing any long-term benefits from the launch of HBO Max in May 2020 or more favorable trends at Warner Bros. Turner drives most of the EBITDA at WarnerMedia, but “it is difficult to see a scenario in which results from Turner don’t keep getting worse,” Moffett wrote. The networks are “facing the worst of the cord-cutting trend,” which is causing a 3% to 4% annual decline in the number of pay-TV households in the U.S.
Despite the draw of the NBA and NCAA March Madness basketball, the Turner networks are chiefly entertainment networks and therefore have less-than-optimal pricing power, Moffett contends. In addition to slippage in affiliate fees, Moffett wrote, “advertising will reflect ratings that are down more than 20% year over year through most of 2019.”
Even though “the whole cable industry is suffering,” Moffett added, “Turner, with its disproportionate exposure to non-sports entertainment, is suffering far more than peers.”
Political advertising and tune-in will help CNN in 2020, but even so the election year “will still be challenging. And 2021, without political, will be more challenging still.”