We downgrade the Canadian cable MSO, Shaw Communications Inc. (SJR) to Neutral based on the company’s high level of current valuation and growing competitive threat in the Canadian cable TV market.
Why the Downgrade
The stock price of Shaw Communications surged 29.5% in the last year, significantly outpacing the S&P 500 return of just 12.1% in the last year. The stock is currently trading at the high-end of its 52-week price range.
With respect to several valuation metrics, Shaw Communications is also trading at significantly higher multiples compared to the S&P 500. We believe the company is currently fairly valued and the stock price will not provide above market gain any time soon. Shaw Communications currently has a Zacks Rank #3 (Hold).
Other Causes of Concern
In the first quarter of fiscal 2013, Shaw Communications lost 23,912 basic cable TV subscribers and 4,021 DTH customers. This indicates that the company’s cable operation is facing severe problems. Telus Corp.’s (TU) popular Optik TV is offering IPTV service, which supports over 400 digital channels with more than 100 HD channels.
It also supports 3D channels and on demand 3D movies along with Xbox 360, which acts as a secondary set top box, thus creating a lot of pressure on Shaw Communications’ market share.
Shaw Communications decided to put aside its much-hyped plan to enter into the wireless market of Canada. Instead, the company now intends to build a cheaper Wi-Fi network, which will enable offloading 3G/4G wireless data traffic across a short distance from landline Internet access points, such as homes, offices, snacks bars, etc.
We believe the decision of Shaw Communications to abandon its wireless venture will significantly reduce the company’s competitive strength in a highly lucrative Canadian telecom market.
Canadian Telecom Stocks that Warrant a Look
While for the time being, we prefer to remain on the sidelines for Shaw Communications, other Canadian telecom stocks worth a look are Rogers Communications Inc. (RCI), BCE Inc. (BCE) and Telus Corp. All these three stocks currently have a Zacks Rank #3 (Hold).Read the Full Research Report on SJR
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