Pressures on AT&T’s entertainment business will impact the company’s profits, according to Jefferies, which downgraded the telecommunications giant on Thursday.
“We are downgrading the stock from Buy to Hold largely on concerns related to the entertainment segment as cord shaving and spin downs continue to pressure margins,” analyst John Janedis wrote in a note to clients.
“On the Time Warner front,” he added, “we assume the deal will get approved, which could benefit the stock in the short term. However, we also think there’s risk that programming investment at both HBO and Turner will need to move higher given increased over-the-top competition, which could cap upside to the $1.5 billion of expected cost synergies.”
Janedis also cut his price target on shares of AT&T, reducing the forecast to $35 from $40 and implying 4.85 percent upside for shareholders over the next 12 months.
“Given increased competition from Netflix, Hulu, Amazon, and OTT players, ratings for
traditional players remain under pressure,” the analyst added. “For HBO, while still the leading linear premium cable player, we think programming inflation is undeniable. When we marry the
combination of competition, ratings pressure, and programming cost inflation, we think there is the potential that T/TWX management will look to increase programming spend following a review of the TV landscape once the deal closes.”
Shares fell 0.5 percent in premarket trading following the Jefferies report, set to add to the company’s 14 percent loss so far this year.
The Jefferies concerns around cord-cutting are neither unique nor new, though continue to plague the Dallas, Texas-based conglomerate. AT&T’s chief financial officer, John Stephens, addressed analyst questions on the topic during the company’s earnings call in April.
“I think we’re going to continue to see challenges in the satellite in the linear pay-TV model as we’ve talked about,” he said. “We’ll continue to see real opportunities to shift to the over-the-top and continue to grow DTV NOW.”