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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 like Comcast (CMCSA) offer pay-TV services, including Internet-based streaming content. Some of the companies like DISH Corporation (DISH) 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 four major themes:

  • The growing demand for high-speed Internet has benefited the cable television industry participants like Comcast and Charter Communications (CHTR). Improving Internet speed is driving demand for high-quality video and the trend of binge viewing. Further, improving broadband ecosystem in international markets along with proliferation of smart TVs is anticipated to drive growth.

 

  • 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.

 

  • Cable television’s 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 #88, which places it in the top 35% 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 moved up 2.8%.

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 26.3% over this period compared with the broader sector’s rise of 15.8%. The S&P 500 has risen 17.4% 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 7.78X compared with the S&P 500’s 11.40X and the sector’s 10.19X.

Over the last five years, the industry has traded as high as 19.42X, as low as 7.07X and at the median of 10.49X, as the chart below shows.


EV/EBITDA Ratio (TTM)

 


 

Stocks to Consider

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.

Here, we present three stocks in the Zacks Cable Television industry that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and are well positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

Phoenix, AZ-based Cable One (CABO) is a broadband communications provider. The company sports a Zacks Rank #1. Moreover, the stock has returned 81.4% in the past year.

The consensus estimate for Cable One’s 2019 earnings has climbed 4.6% to $31.40 over the past 30 days.

Price and Consensus: CABO

 



Toronto, Canada-based Shaw Communications (SJR) is a provider of cable television, high-speed data and video services. Shares of this Zacks Rank #2 company have gained 8.5% in the past year.

The consensus mark for the company’s fiscal 2020 earnings has climbed 4.8% to $1.09 over the past 30 days.

Price and Consensus: SJR

 



Another Zacks Rank #2 company, Englewood, CO-based Liberty Broadband (LBRDK) has returned 53.5% in the past year. The current Zacks Consensus Estimate for its 2019 earnings has remained steady at $1.11 over the past 30 days.


Price and Consensus: LBRDK


 







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Shaw Communications Inc. (SJR) : Free Stock Analysis Report
 
Liberty Broadband Corporation (LBRDK) : Free Stock Analysis Report
 
DISH Network Corporation (DISH) : Free Stock Analysis Report
 
Comcast Corporation (CMCSA) : Free Stock Analysis Report
 
Charter Communications, Inc. (CHTR) : Free Stock Analysis Report
 
Cable One, Inc. (CABO) : Free Stock Analysis Report
 
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