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 to a varied group of customers. Some of them also provide equipment that includes 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 their subscribers access to cable television channels owned by programmers and distributed over the network backbone. Cable companies also sell advertising on their video channels.
The industry requires high capital expenditure on infrastructure to provide better services to customers. Moreover, the industry is highly regulated with the Federal Communications Commission (FCC) mandating rules.
Here are the three major themes in the industry:
- The Cable television industry is witnessing a sea change on rapid evolution of distribution platforms as well as entry of players and the newest technologies. The industry-wide trend of declining profitability of residential video services due to increasing programming costs and retransmission fees has made it difficult for traditional companies to survive. Additionally, increasing consumer demand for on-demand content has led to increasing proliferation of streaming service providers like Netflix, Hulu, HBO and Amazon Prime. This has made it particularly difficult for traditional cable television companies to maintain a viewer base. Further, the traditional pay-TV industry is maturing with continuing industry consolidation. Moreover, residential voice services have witnessed significant decline in revenues due to increasing usage of wireless voice services.
- Growing consumer preference for digital and subscription services instead of linear pay-TV and rental or outright purchase has also 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 due to the midterm elections in 2018. As a series of contests are scheduled for November, momentum in political spending is expected to remain strong. However, weakness in auto, which is a major ad category, isn’t happy news for the industry. Moreover, the industry is facing significant regulatory hurdles related to mergers & acquisitions that can thwart growth.
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 #20, which places it at the top 8% of 256 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the 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. In the past year, the industry’s earnings estimate for the current year has increased by 5%.
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 Lags on Stock Market Performance
The Zacks Cable Television Industry has lagged the broader Zacks Consumer Discretionary Sector as well as the S&P 500 index over the past year.
The industry has declined 13.4% over this period compared to the S&P 500 index’s rise of 8.6% and broader sector’s rally of 4.4%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing cable companies, we see that the industry’s currently trading at 16.18X compared with the S&P 500’s 11.33X. It is also above the sector’s trailing-12-month EV/EBITDA of 14.86X.
Over the last five years, the industry has traded as high as 19X, as low as 6.34X and at the median of 10.09X, as the chart below shows.
EV/EBITDA Ratio (TTM)
Cable companies are trying to fast adapt to the changing landscape of the industry. Focus on providing bundled offerings and on demand programming content that caters to changing consumer behavior bodes well for the industry participants.
Here, we present four stocks that either have a Zacks Rank #1 (Strong Buy) or Rank 2 (Buy). These stocks are well positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.
DISH Network Corporation (DISH): Englewood, Colorado-based pay-TV service provider has lost 31.3% in the past year. The current fiscal Zacks Consensus Estimate EPS estimate for this Zacks Rank #1 stock has remained stable over the last 30 days.
Price and Consensus: DISH
Liberty Global PLC (LBTYA): The current fiscal consensus estimate for this European provider of video, broadband Internet, fixed-line telephony, mobile and other communications services has moved up from a loss of 2 cents to EPS of 8 cents over the last 30 days. This Zacks Rank #1 stock has lost 20.4% in the past year.
Price and Consensus: LBTYA
Shaw Communications (SJR): This Zacks Rank #1 stock lost 14.5% in the past year. The consensus EPS estimate for this company has remained stable over the last 30 days.
Price and Consensus: SJR
Cable One (CABO): This Zacks Rank #2 (Buy) stock gained 12.6% in the past year. The consensus EPS estimate for this company has climbed 0.6% over the last 30 days.
Price and Consensus: CABO
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