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3 Cable Stocks to Buy For in a Prospering Industry

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Aniruddha Ganguly
·7 min read
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The Zacks Cable Television industry is benefiting from the spike in the coronavirus-led demand for high-speed broadband. Moreover, increased consumption of media due to the pandemic-induced lockdowns and shelter-at-home guidelines has been a key catalyst for industry participants like Liberty Broadband (LBRDK), DISH Network (DISH) and Rogers Communication (RCI).

In addition, focus on providing bundled offerings and on-demand programming content that cater to changing consumer behavior bodes well for industry players. However, cord-cutting is rising on the intensifying competition from over-the-top service providers like Netflix, Hulu, HBO Max, Amazon prime video and Peacock.

Industry Description

The Zacks Cable Television industry primarily comprises companies that provide integrated data, video and voice services. The industry participants like Comcast offer pay-TV services, including Internet-based streaming content. Some of the companies like DISH Network provide equipment such as satellite dish, digital set-top receivers and remote controls.

Typically, cable companies either build their own network backbone or lease physical access to the network backbone from telecommunication companies. These companies also purchase licenses to provide subscribers access to cable television channels owned by programmers and distributed over the network backbone. Cable companies also sell advertising spots on their channels.

The industry requires high capital expenditure on infrastructure to enhance its services. Also, the industry is highly regulated by the Federal Communications Commission (FCC).

4 Trends Shaping the Future of the Cable Industry

Skinny Bundles, Original Content Driving Growth: Cable television’s ability to generate ad revenues outside traditional TV platforms, such as websites and any digitally-consumed platform, provides increased scope for target-based advertising. Nevertheless, consumers’ unfavorable disposition, particularly toward advertising, has hit industry participants hard. Further, growing consumer preference for digital and subscription services instead of linear pay-TV and rental or outright purchase has compelled industry players to alter their business models. Cable television companies are now offering a variety of alternative packages, including skinny bundles, which are delivered at lower costs than traditional offerings. These companies are also innovating in terms of original content to be competitive against streaming service providers.

High-Speed Internet Demand Key Catalyst: The growing demand for high-speed Internet, including broadband, has aided the cable television industry participants like Comcast and Charter. Improving Internet speed is fueling demand for high-quality video and the trend of binge viewing. Further, a strengthening broadband ecosystem in international markets, along with proliferation of smart TVs, is anticipated to drive growth. Also, the surging work-from-home trend and online-learning practice owing to the coronavirus-induced quarantines and lockdowns has boosted Internet usage, which is supporting the industry participants.

Cord Cutting and Matured PayTV Industry Hurting Prospects: The cable television industry is witnessing the rapid evolution of distribution platforms as well as embracing new players and advanced technologies. Declining profitability of residential video services due to rising programming costs and retransmission fees has made survival difficult for traditional companies. Additionally, the heightening need for on-demand content has led to the mushrooming of streaming service providers like Netflix, Hulu, HBO Max and Amazon prime video. This has made it particularly tricky for traditional cable television companies to maintain a viewer base. Furthermore, the traditional pay-TV industry is maturing with widespread consolidation. Moreover, residential voice service revenues are declining on the rising shift to wireless voice services.

Coronavirus Outbreak Impeding Business Growth: The coronavirus crisis is majorly impacting the U.S. economy, resulting in massive job losses and in turn, prompting chances of further cord cutting. Cable companies like Comcast and Charter Communications (CHTR) are participating in the FCC's Keep Americans Connected Pledge, pausing disconnects and collection efforts for residential and SMB customers affected by the coronavirus mayhem. This is expected to hurt top-line growth, at least in the near term. Apart from this, small- and medium-sized businesses are the worst hit by the pandemic. Cable companies’ substantial exposure to this cohort is also bothersome.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Cable Television industry is housed within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #29, which places it in the top 11% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms Sector, S&P 500

The Zacks Cable Television industry has underperformed the broader Zacks Consumer Discretionary sector as well as the S&P 500 composite over the past year.

The industry has risen 40% over this period compared with the broader sector’s rise of 15.1%. The S&P 500 has climbed 51.7% during the same time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the trailing 12-month EV/EBITDA, a commonly used multiple for valuing cable companies, we see that the industry is currently trading at 12.50X compared with the S&P 500’s 18.68X and the sector’s 17.23X.

Over the past five years, the industry has traded as high as 19.25X, as low as 8.27X and at the median of 10.58X as the chart below shows.

EV/EBITDA Ratio (TTM)

3 Cable Stocks to Watch Out For

Liberty Broadband: The company is benefiting from Charter’s solid prospects driven by COVID-led demand for high-speed Internet. Moreover, Charter’s growing mobile business is a key catalyst. Further, TripAdvisor is likely to benefit from pent-up travel demand. The acquisition of GCI Liberty is expected to drive top-line growth.

Shares of this Zacks Rank #1 (Strong Buy) company have declined 0.7% in the year so far. The Zacks Consensus Mark for Liberty’s ongoing-year earnings has moved up by a penny to $2.53 per share in 30 days’ time. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: LBRDK

DISH Network: The company’s focus on acquiring and retaining subscribers, who will be profitable over the long term, is anticipated to stoke growth. Additionally, DISH’s partnership with the likes of Qualcomm, Aviat, Everstream, Segra, Uniti, Zayo, Mavenir, Fujitsu, Altiostar, VMware and MATRIXX Software for its standalone 5G network is a key catalyst. Moreover, it partnered Crown Castle for wireless towers. These initiatives bode well for DISH’s top-line growth over the long haul.

Englewood, CO-based DISH has returned 14%, year to date. The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s current-year earnings has moved 1% north to $3.09 per share over the past 30 days.

Price and Consensus: DISH

Rogers Communication: This Zacks Rank #2 company continues to benefit from Internet subscriber additions and shift of Internet users to higher-usage tiers. The company’s investments in 5G spectrum and partnerships with leading real estate companies to support 5G infrastructure deployment are catalysts. Moreover, it has expanded the Rogers 5G network to 130 cities and towns, which will be a major growth driver over the long haul. Further, the acquisition of Shaw Communications (SJR) is expected to expand user base.

Shares of this Canada-based company have rallied 4.5% year to date. The consensus mark for 2021 earnings has moved up by a penny to $3.06 per share in the past 30 days.

Price and Consensus: RCI

+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities

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Shaw Communications Inc. (SJR) : Free Stock Analysis Report

Rogers Communication, Inc. (RCI) : Free Stock Analysis Report

Liberty Broadband Corporation (LBRDK) : Free Stock Analysis Report

DISH Network Corporation (DISH) : Free Stock Analysis Report

Charter Communications, Inc. (CHTR) : Free Stock Analysis Report

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