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Cable Television Industry's Near-Term Prospects Lack Luster

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The Zacks Cable Television industry primarily comprises companies that provide integrated data, video and voice services. The industry participants like Comcast (CMCSA - Free Report) offer pay-TV services, including Internet-based streaming content. Some of the companies like DISH Corporation (DISH - Free Report) 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 five major themes:

  • Coronavirus is majorly impacting the U.S. economy, resulting in massive job losses and in turn driving chances of further cord cutting. Cable companies like Comcast and Charter Communications (CHTR - Free Report) are participating in the FCC's Keep Americans Connected Pledge, pausing disconnects and collection efforts for residential and SMB customers impacted by coronavirus. This is expected to hurt top-line growth, at least in the near term. Moreover, small and medium-sized businesses are the worst hit by the pandemic. Cable companies’ substantial exposure to this cohort is also bothersome.

 

  • 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 automotive, which is a major ad category, is a concern for the industry. Moreover, cancellation of big sports events like the Tokyo Olympics due to the coronavirus pandemic has negatively impacted ad-sales, a trend which is expected to continue in the rest of 2020. Further, the industry faces significant regulatory hurdles related to mergers and acquisitions.

 

  • The growing demand for high-speed Internet including broadband has benefited the cable television industry participants like Comcast and Charter. 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. Moreover, surging work-from-home trend and online-learning practice due to the coronavirus-induced quarantines and lockdowns spiked Internet usage, which is benefiting the industry participants.

 

  • 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.

 

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 #170, which places it in the bottom 33% 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 gloomy 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.

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 risen 14.7% over this period against the broader sector’s fall of 2%. The S&P 500 has climbed 9.7%.

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 10.28X compared with the S&P 500’s 12.11X and the sector’s 10.48X.

Over the past five years, the industry has traded as high as 19.25X, as low as 8.27X and at the median of 10.36X 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 Zacks Rank #2 (Buy) stocks which are well-positioned to grow in the near term.

Liberty Global (LBTYA - Free Report) : Shares of this international provider of video, broadband Internet, fixed-line telephony, mobile and other communications services have declined 11.6% in the past year. The Zacks Consensus Estimate for this company’s 2020 loss has narrowed from 85 cents to 78 cents over the past 30 days.

Price and Consensus: LBTYA

 

Shaw Communications (SJR - Free Report) : Shares of this Canadian company have declined 7.2% in the past year. The consensus estimate for this company’s fiscal 2020 earnings has moved up 5.5% to 96 cents per share over the past 30 days.

Price and Consensus: SJR

 

 

 

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