Yahoo Finance 2 Cable Stocks to Buy From a Challenging Industry
The Zacks Cable Television industry is witnessing a rise in cord-cutting on pay-TV options, including cable TV and satellite TV, due to intensifying competition from over-the-top service providers’ innovative content offerings. The focus on providing bundled offerings and on-demand programming content that cater to changing consumer behavior bodes well for streaming players. Despite stiff competition, Cable Television industry players are benefiting from the spike in demand for high-speed broadband. The evolving hybrid work environment is driving the demand for WiFi devices and wireless Internet. The increased media consumption has been a key catalyst for industry participants like Rogers Communication RCI and Liberty Global LBTYA.
Industry Description
The Zacks Cable Television industry primarily comprises companies that provide integrated data, video and voice services. Industry participants offer pay-TV services, including Internet-based streaming content. These companies provide equipment, such as satellite dishes, digital set-top receivers and remote controls. Typically, cable companies either build their network backbone or lease physical access to the network backbone from telecommunication companies. These companies 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 a high capital expenditure on infrastructure to enhance its services. The industry is highly regulated by the Federal Communications Commission.
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, the 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 Act as Key Catalyst: The growing demand for high-speed Internet, including broadband, has aided cable television industry participants like Comcast and Charter. Improving Internet speed is fueling the demand for high-quality video and the trend of binge-watching. Further, a strengthening broadband ecosystem in the international markets, along with the proliferation of smart TVs, is anticipated to drive growth. Also, the surging work-from-home trend and online-learning practice due to the coronavirus-induced quarantines and lockdowns have boosted Internet use, thus supporting 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 profits of residential video services due to rising programming costs and retransmission fees have made survival difficult for traditional companies. The heightened need for on-demand content has led to the mushrooming of streaming service providers, making it particularly tricky for traditional cable television companies to maintain a viewer base. 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 challenge with TV ads is that marketers have difficulty getting actionable metrics and insights, such as attribution data. At this time, marketers must look for outside-the-box solutions to extract conversion data from offline media. TV has taken a secondary role in most marketing strategies due to the growing influence of digital marketing. Many marketers are increasing ad spending on digital mediums due to their unmatched ability to deliver personalized messages that are easy to measure. Cable TV players are set to face competition for ad dollars from streaming service providers like Netflix and Disney, which are raising prices and introducing cheaper ad-supported packages now that their subscriber growth has slowed.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Cable Television industry is housed within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #193, which places it in the bottom 23% 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 dim 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 position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. Since May 31, 2022, the industry’s earnings estimates for 2023 have moved down 11.6%.
Despite the industry’s gloomy prospects there are few stocks that are worth buying. But 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 and the S&P 500 composite over the past year.
The industry has declined 22.1% over this period compared with the broader sector’s fall of 6%. The S&P 500 has climbed 2% 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 6.83X compared with the S&P 500’s 12.45X and the sector’s 7.74X.
Over the past five years, the industry has traded as high as 17.89X, as low as 6.29X and at the median of 10.78X, as the chart below shows.
EV/EBITDA Ratio (TTM)
2 Cable Stocks to Buy Right Now
Rogers: This Zacks Rank #2 (Buy) company continues to benefit from Internet subscriber additions and the shift of Internet users to higher-use tiers. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Rogers’ investments in the 5G spectrum and partnerships with leading real estate companies to support 5G infrastructure deployment are catalysts. Moreover, the acquisition of Shaw Communications is expected to expand RCI’s subscriber base in the long haul.
Toronto, Canada-based Rogers has declined 0.5% year to date. The company’s current-year earnings has moved 11% north to $3.69 per share over the past 30 days.
Price and Consensus: RCI
Liberty Global: This international provider of video, broadband Internet, fixed-line telephony, mobile and other communications services is benefiting from increasing Internet speed and an expanded mobile subscriber base. Increasing demand for higher Internet speed in the U.K. has been a key catalyst.
Shares of this Zacks Rank #2 company have declined 11.8% in the year so far. The Zacks Consensus Estimate for Liberty’s ongoing year’s loss has widened to $1.18 per share in 30 days’ time.
Price and Consensus: LBTYA
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Rogers Communication, Inc. (RCI) : Free Stock Analysis Report
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