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Shaw (SJR) Down 3.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Shaw Communications (SJR). Shares have lost about 3.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Shaw due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Shaw Communications Q3 Results Drive on Wireless Growth

Shaw Communications reported third-quarter fiscal 2019 adjusted earnings from continuing operations of 33 cents per share, beating the Zacks Consensus Estimate by 8 cents. However, total revenues of $988 million lagged the consensus mark of $1.02 billion.

In Canadian currency, the company reported adjusted earnings of C$0.44 per share against the year-ago quarter’s loss of C$0.20. Total revenues increased 2.7% to C$1.32 billion.

During the reported quarter, Shaw Communications acquired 600 MHz spectrum for $492 million. The company also completed the sale of 80.6 million Class B non-voting participating shares of Corus Entertainment for net proceeds of roughly $526 million.

Segment Details

Wireline revenues (81.2% of total revenues) increased 1% on a year-over-year basis to C$ 1.08 billion.

Consumer revenues were almost unchanged at $925 million. Higher contributions from rate adjustments and growth in Internet revenues were negated by declines in Video, Satellite and Phone subscribers and revenues.

Business revenues increased 6.4% to $150 million, driven by continued demand for the SmartSuite of business products.

Wireless service revenues (13.4% of total revenues) rallied 21.9% from the year-ago quarter to $178 million, primarily driven by higher post-paid revenue generating units (RGUs) or subscribers. Improved penetration of Big Gig data plan drove the top line.

Average billing per subscriber unit (ABPU) rose 6.2% to $42.30, driven by increased number of customers subscribing to higher service plans and purchasing a device through Freedom Mobile.

Wireless Average Revenue per Subscriber Unit (ARPU) increased 2.2% year over year to $38.36.

Wireless Equipment revenues (5.5% of total revenues) declined 8.8% year over year to $73 million.

Subscriber/RGU Details

In the Wireline-Consumer segment, the video cable lost 24,303 subscribers in the three months ended May 31, 2019. Phone lines also lost 21,517 customers.

However, Shaw Communications’ wireline Internet business gained 6,647 customers in the quarter. Video satellite customer count also increased 3,134.

In the Wireline-Business Network Service segment, the video cable and video satellite lost 4,301 and 626 customers, respectively, in the quarter. Nevertheless, the company gained 5,368 phone customers and 427 Internet customers.

In the Wireless segment, Shaw Communications gained 61,300 post-paid subscribers and 800 pre-paid customers. Moreover, wireless post-paid churn improved from 1.36% to 1.18% on a year-over-year basis.

Shaw Communications’ wireless service is available in 240 locations through national retail partners — Loblaws’ “The Mobile Shop” and Walmart. Freedom Mobile expects to have more than 650 retail locations operational at the end of 2019.

Notably, the company now serves approximately 17 million people or almost half of the Canadian population.

Operating Details

In third-quarter fiscal 2019, operating income before restructuring costs and amortization decreased 1.5% year over year to $530 million. Operating margin before restructuring costs and amortization contracted 170 basis points (bps) to 40%.

Segment wise, wireline operating income decreased 2.1% to $475 million. Wireline segment operating margin shrank 140 bps to 44.2%.

Excluding $15 million negative impact related to the licensing payment, wireline operating income before restructuring costs and amortization increased 1% year over year.

Wireless operating income increased 3.8% to $55 million, primarily owing to ABPU and RGU growth. Wireless segment operating margin was 21.9%, down 150 bps year over year, primarily due to the negative impact of credit for a retroactive domestic roaming rate adjustment in the year-ago quarter worth $13 million.

Notably, almost 350 employees exited the company in the quarter, due to the voluntary departure program (VDP) under the Total Business Transformation (TBT) initiative. This led to operating cost savings of approximately $73 million and capital cost reductions of roughly $25 million.

Balance Sheet & Cash Flow Details

As of May 31, 2019, Shaw Communications had cash of $1.43 billion compared with $384 million as of Aug 31, 2018. Moreover, undrawn bank credit facility was $1.5 billion.

Under the company’s accounts receivable securitization program, an additional $160 million was available to be drawn.

Cash balance increased primarily due to the issuance of $1 billion of senior notes. Net proceeds from the senior notes issuance, sale of Corus and other portfolio investments, and disposal of property, plant and equipment were $993 million, $551 million and $46 million, respectively.

Moreover, as of May 31, 2019, company’s net debt leverage ratio was 1.8x lower than management’s optimal range of 2-2.5x.

In the third quarter, capital expenditures were $280 million compared with $308 million reported in the year-ago quarter.

Wireline capital spending decreased roughly $47 million, primarily due to lower investment in network upgrades. However, wireless spending increased almost $19 million year over year due to continued deployment of 700 MHz spectrum and expansion of the wireless network into new markets.

Free cash flow was $176 million compared with $167 million in the year-ago quarter. The improvement was primarily owing to lower capital expenditure and cash taxes.

Guidance

For fiscal 2019, Shaw Communications expects operating income before restructuring costs and amortization to grow roughly 6% year over year.

Capital investments are expected to be approximately $1.2 billion, while free cash flow is likely to be roughly $550 million.

Management expects $135 million of operating and capital savings in fiscal 2019 related to TBT initiatives.

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months.

VGM Scores

At this time, Shaw has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Shaw has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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