US Cable: Lower Broadband Penetration Assumptions Hit Fair Values, but Shares Still Look Cheap

Our confidence in Comcast CMCSA and Charter’s CHTR ability to maintain pricing discipline while stemming broadband customer losses has weakened. US cable firms showed no improvement in the first quarter, the FCC is preparing additional wireless spectrum for auction, and SpaceX SPCX poses an incremental threat.

The bottom line: We reduce our fair value estimates for Charter to $280 per share from $400 and for Comcast to $36 from $41. The larger cut to Charter results from its debt load, amplifying the impact of forecast changes. We haven’t changed our expectations for Comcast’s media segment.

• We have also increased our Uncertainty Rating for Charter to Very High from High. With Charter’s equity value shrinking sharply relative to its debt load, we expect share price volatility to remain elevated.
• While we still expect both firms to generate stable cash flow in the coming years, we strongly prefer Comcast to Charter, since both are sharply undervalued, in our view. Comcast’s smaller debt load provides more downside protection if our revised estimates prove too optimistic, and we like the plan to spin off the media business.

Big picture: Our expectation that capacity constraints would slow fixed wireless growth hasn’t materialized. The FCC plans to auction 160 MHz of spectrum in 2027. While this is a fraction of what was sold to carriers earlier this decade, it could still provide incremental capacity.

• We expect SpaceX’s Starlink broadband service to remain focused on rural areas and semi-mobile applications, limiting its impact on cable. Still, the firm is readying a new generation of satellites that it believes will increase capacity 10-fold.
• We suspect Starlink is limited to a mid-single-digit number of customers per square mile today. If that figure increases to 50 in the coming decade, we estimate that satellites would have a small but noticeable impact on the cable companies. We’ve lowered our customer base forecasts for Comcast and Charter to reflect this potential.