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. 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 the COVID-led demand for high-speed broadband. Strong demand for WiFi devices and wireless Internet has been a growth factor. 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 Quick Quote CMCSA - Free Report) , Charter Communications ( CHTR Quick Quote CHTR - Free Report) and Rogers Communication ( RCI Quick Quote RCI - Free Report) . 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 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 a 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: Growing demand for high-speed Internet, including broadband, has aided 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 have boosted Internet usage, thus 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 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. 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 pandemic has resulted in a decrease in video subscribers, primarily due to further cord-cutting and a decline in Internet user expansion with the lifting of COVID curbs. Small- and medium-sized businesses have been the worst hit and are still recovering from the coronavirus-induced economic slowdown in the United States. Cable companies’ substantial exposure to this cohort is bothersome for investors. 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 #198, which places it in the bottom 22% of more than 250 Zacks industries.
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.
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 declined 31% over this period against the broader sector’s decline of 36.6%. The S&P 500 has declined 3.8% 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 9.22X compared with the S&P 500’s 12.54X and the sector’s 9.81X.
Over the past five years, the industry has traded as high as 19.25X, as low as 8.27X and at the median of 10.82X as the chart below shows.
EV/EBITDA Ratio (TTM)
3 Cable Stocks in Focus
Comcast: This Philadelphia, PA-based company is riding on an expanding broadband subscriber base and strong momentum in the 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 declined 25.2% in the past year. The Zacks Consensus Mark for Comcast’s ongoing-year earnings has increased 0.9% to $3.55 per share in 30 days’ time.
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.
Charter’s shares have declined 31.3% in the past year. The consensus mark for 2022 earnings has moved down 0.5% to $29.74 per share in the past 30 days.
Price and Consensus: CHTR Rogers Communication: This Zacks Rank #3 company continues to benefit from Internet subscriber additions and the shift of Internet users to higher-usage tiers. The company’s investments in the 5G spectrum and partnerships with leading real-estate companies to support 5G infrastructure deployment are catalysts. Moreover, it has expanded the Rogers 5G network to 1500 communities, which will be a major growth driver over the long haul. Further, the acquisition of Shaw Communications is expected to expand its user base.
Shares of this Canada-based company have declined 2.4% in the past year. The consensus mark for 2022 earnings has moved down 1.9% to $3.06 per share in the past 30 days.
Price and Consensus: RCI