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3 Cable Stocks to Watch Out For in a Prospering Industry

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The Zacks Cable Television industry is benefiting from the spike in the coronavirus-led demand for high-speed broadband. Increased consumption of media due to the pandemic-induced lockdowns and shelter-at-home guidelines has been a key catalyst for industry participants like Comcast (CMCSA - Free Report) , Charter Communications (CHTR - Free Report) and DISH Network (DISH - Free Report) .  

In addition, focus on providing bundled offerings and on-demand programming content that cater to changing consumer behavior bodes well for industry players. However, cord-cutting is rising on the intensifying competition from over-the-top service providers like Netflix (NFLX - Free Report) , Hulu, HBO Max, Amazon prime video and Peacock.

Industry Description

The Zacks Cable Television industry primarily comprises companies that provide integrated data, video and voice services. Industry participants like Comcast offer pay-TV services, including Internet-based streaming content. DISH Network provides equipment such as 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 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 high capital expenditure on infrastructure to enhance its services. The industry is highly regulated by the Federal Communications Commission (FCC).

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, 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 Key Catalyst: The growing demand for high-speed Internet, including broadband, has aided the cable television industry participants like Comcast and Charter. Improving Internet speed is fueling demand for high-quality video and the trend of binge viewing. Further, a strengthening broadband ecosystem in international markets, along with proliferation of smart TVs, is anticipated to drive growth. Also, the surging work-from-home trend and online-learning practice owing to the coronavirus-induced quarantines and lockdowns has boosted Internet usage, which is supporting the 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 profitability of residential video services due to rising programming costs and retransmission fees has made survival difficult for traditional companies. Additionally, the heightening need for on-demand content has led to the mushrooming of streaming service providers like Netflix, Hulu, HBO Max and Amazon prime video. This has made it particularly tricky for traditional cable television companies to maintain a viewer base. Furthermore, 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 coronavirus crisis is majorly impacting the U.S. economy, resulting in massive job losses and in turn, prompting chances of further cord cutting. Markedly, small- and medium-sized businesses are the worst hit by the pandemic. Cable companies’ substantial exposure to this cohort is bothersome for investors.

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 #108, which places it in the top 43% 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 bright 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, Lags S&P 500

The Zacks Cable Television industry has outperformed the broader Zacks Consumer Discretionary sector but lags the S&P 500 composite over the past year.

The industry has risen 29.6% over this period compared with the broader sector’s rise of 12.4%. The S&P 500 has climbed 30% 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 14.06X compared with the S&P 500’s 16X and the sector’s 16.05X.

Over the past five years, the industry has traded as high as 14.06X, as low as 9.97X and at the median of 12.05X as the chart below shows.

EV/EBITDA Ratio (TTM)
 

3 Cable Stocks to Watch Out For

Comcast: The Philadelphia, PA-based company is riding on an expanding broadband subscriber base and strong momentum in wireless business apart from advertising revenue growth. Its strategy to provide high-speed Internet at an affordable price plays a pivotal role in providing connectivity and improving customer experience. Moreover, coronavirus-led increased media consumption, and the work-from-home and online-learning wave bode well for Comcast’s Internet business. Its streaming service, Peacock, gained significant traction within a short span and is a key catalyst in driving broadband sales.

Shares of this Zacks Rank #3 (Hold) company have increased 13.6% in the year so far. The Zacks Consensus Mark for Comcast’s ongoing-year earnings has moved up 3.7% to $3.10 per share in 30 days’ time. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: CMCSA

 

Charter Communications: This Zacks Rank #3 company is benefiting from growth in Internet and mobile revenues, and steady customer wins. Internet revenues grew owing to a fortified customer base, promotional roll-off and rate adjustments. Charter continues to witness solid Internet usage due to the coronavirus-induced work-from-home and online-learning routine. The company’s broadband service has gained traction among SMBs and enterprises. Additionally, an expanding mobile-subscriber base is a key catalyst.

Shares of this Stamford, CT-based company have rallied 19.8% year to date. The consensus mark for 2021 earnings has moved up 5.2% to $20.87 per share in the past 30 days.

Price and Consensus: CHTR

 

DISH Network: The company’s focus on acquiring and retaining subscribers, who will be profitable over the long term, is anticipated to stoke growth. Additionally, DISH’s partnership with the likes of Qualcomm, Aviat, Everstream, Segra, Uniti, Zayo, Mavenir, Fujitsu, Altiostar, VMware and MATRIXX Software for its standalone 5G network is a key catalyst. Moreover, it partnered Crown Castle for wireless towers. These initiatives bode well for DISH’s top-line growth over the long haul.

Englewood, CO-based DISH has returned 33.6% year to date. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-year earnings has moved 6.3% north to $3.70 per share over the past 30 days.

Price and Consensus: DISH