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Cable Television Industry Near-Term Prospects Abundant

Aniruddha Ganguly

The Zacks Cable Television industry primarily comprises companies that provide integrated data, video and voice services. The industry participants offer pay-TV services, including Internet-based streaming content. Some of the companies also provide equipment like 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 telecommunications companies. They 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 services. Moreover, the industry is highly regulated by the Federal Communications Commission (FCC).

Here are the industry’s three major themes:

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

 

  • Growing consumer preference for digital and subscription services instead of linear pay-TV and rental or outright purchase has compelled industry participants to alter their business models. Moreover, consumers’ unfavorable disposition, particularly toward advertising, has hit industry participants hard. Cable television companies are now offering a variety of alternative packages, including skinny bundles, which are delivered at lower costs than traditional offerings. They are also innovating in terms of original content to remain competitive against streaming service providers. Further, improving broadband ecosystem in international markets along with proliferation of smart TVs is anticipated to drive growth.

 

  • Cable television is expected to gain from strong political spending pertaining to the U.S. Presidential elections in 2020. Moreover, the ability to generate ad revenues outside traditional TV platforms such as websites and any digitally-consumed platforms provides increased scope for target-based advertising. However, weakness in auto, which is a major ad category, is a concern for the industry. Further, the industry faces significant regulatory hurdles related to mergers and acquisitions.


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 #72, which places it in the top 28% 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 solid 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.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions it appears that analysts are gaining confidence in this group’s earnings growth potential. Since Jan 31, 2019, the industry’s earnings estimate for the current year has increased by almost 2%.

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 Outperforms Sector, S&P 500

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

The industry has returned 23.4% over this period compared with the broader sector’s rise of 1.2%. The S&P 500 has risen 6.1% in the said time frame.

One-Year Price Performance

 


Industry’s Current Valuation

On the basis of the trailing 12-month EV/EBITDA, which is a commonly used multiple for valuing cable companies, we see that the industry is currently trading at 11.44X compared with the S&P 500’s 11.11X and the sector’s 13.1X.

Over the last five years, the industry has traded as high as 19.42X, as low as 7.98X and at the median of 10.47X, as the chart below shows.


EV/EBITDA Ratio (TTM)



 

Stocks to Watch

Cable companies are trying to fast adapt to the changing industry landscape. Focus on providing bundled offerings and on-demand programming content that cater to changing consumer behavior bodes well for industry participants.

Currently, none of the stocks in the Zacks Cable Television industry flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Here, we present two stocks that have a Zacks Rank #2 (Buy) and are well positioned to grow in the near term.

Rogers Communications (RCI): This Toronto, Canada-based cable television, high-speed data and video services provider has returned 7.1% in the past year. The Zacks Consensus Estimate for 2019 earnings has climbed by a penny to $3.40 over the past 30 days.

Price and Consensus: RCI

 

 

Shaw Communications (SJR): This Toronto, Canada-based cable television, high-speed data and video services provider has lost 3.1% in the past year. The consensus mark for its fiscal 2019 earnings has climbed 12.2% to $1.10 over the past 30 days.

Price and Consensus: SJR

 



We are also presenting a couple of stocks with a Zacks Rank #3 (Hold) that investors may hold on to.

Comcast Corporation (CMCSA): This Philadelphia, PA-based global media and technology company has returned 27.7% in the past year. The current Zacks Consensus Estimate for its 2019 earnings has increased by a penny to $3.03 over the past 30 days.


Price and Consensus: CMCSA

 



Cable One (CABO): The stock of this Phoenix, AZ-based broadband communications provider has gained 64.4% in the past year. The consensus estimate for this company’s 2019 earnings has climbed 2.2% to $31.42 over the past 30 days.

Price and Consensus: CABO

 


 

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Shaw Communications Inc. (SJR) : Free Stock Analysis Report
 
Rogers Communication, Inc. (RCI) : Free Stock Analysis Report
 
Comcast Corporation (CMCSA) : Free Stock Analysis Report
 
Cable One, Inc. (CABO) : Free Stock Analysis Report
 
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