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Buy 4 Pay-TV Service Providers Despite Weak Seasonality

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Legacy pay-TV operators are yet to come to terms with the onslaught of low-cost online video streaming service providers. In the last 10 years, the internal dynamics of the pay-TV market have gradually shifted from legacy pay-TV offerings to low-cost OTT (over-the-top) service providers.

In June 2017, research firm SNL Kagan had predicted that the U.S. pay-TV industry (comprising cable, satellite and IPTV operators) will lose approximately 10.8 million customers by 2021. Total pay-TV subscribers will be around 82.3 million at that time, which will be 20% less than the industry’s historical high level. Last month, Research firm RBC predicted that customer churn in the legacy pay-TV segment could soon accelerate to around 5 million a year.

Moreover, the third quarter of any year is generally known for weak seasonality in the pay-TV segment. Despite this gloomy picture, pay-TV operators currently enjoy certain positives.

Cable MSOs Maintain Lead in High-Speed Broadband Market

The cable multi-service operators (MSOs) in the United States have successfully maintained their lead over telecom operators in the high-speed broadband (Internet) market. According to data compiled by LRG, 14 prime cable TV and telecom operators jointly had around 94.1 million high-speed broadband subscribers at the end of the second quarter of 2017, representing more than 95% of the country’s total broadband market. Of the count cited, cable MSOs commanded nearly 59.91 million subscribers (63.6%), while the remaining 34.24 million customers (36.8%) were serviced by telecom operators.

DOCSIS 3.1: The Net Big Thing in Global Pay-TV Market

With the global pay-TV industry continuously evolving, companies in the league are fighting it out to stay ahead in the competition. The latest in the league is the newly launched DOCSIS 3.1 technology. DOCSIS (Data Over Cable Service Interface Specification) is a communications protocol that allows cable MSOs to provide high-speed broadband connections.

The old-generation DOCSIS 3.0 technology has helped cable TV operators compete in the race for the fastest internet speed available in the market. The next-generation DOCSIS 3.1 standard is an improved formulation of the existing DOCSIS 3.0.

Theoretically, while DOCSIS 3.0 supports 152 Mbps download and 108 Mbps upload speeds, DOCSIS 3.1 offers as high as 10 Gbps downstream and up to 1 Gbps upstream network capabilities. Additionally, DOCSIS 3.1 comes with a slew of operational benefits. The technology is also backward compatible, enabling the present hybrid fiber-coaxial cable lines to allow such high Internet speed by simply switching to a DOCSIS 3.1 compatible modem.

Pay-TV Spending Continue to Rise in Future

In June 2017, research firm Strategy Analytics estimated that annual spending on subscription video and TV services in the United States will reach $130.3 billion in 2019. Major pay-TV operators who offer both traditionally managed TV services and next-generation online services will hold nearly 80% of the market share till 2022. They will continue to do so despite facing intensified competition from OTT service providers. The pay-TV operator’s average revenue is still 10 times higher than the online-video-streaming service providers.

Our Picks

At this stage, we believe investors should choose stocks that carry a favorable Zacks Rank to cash in on future growth. Below, we will briefly discuss four stocks, all of which carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Rogers Communications Inc. (RCI - Free Report) is a provider of cable TV, high-speed Internet access and video retailing, together with wireless and TV and radio broadcasting services. For 2017, the Zacks Consensus Estimate for earnings per share (EPS) is pegged at $2.71, reflecting year-over-year growth of 8.6%. In the last 60 days, the Zacks Consensus Estimate has gone up by 1 cent as three analysts revised their estimates upward. Long-term (three-five years) expected EPS growth is currently pegged at 5.0%. Meanwhile, the consensus estimate for revenues is $11.22 billion, up 8.6% year over year.  

Shaw Communications Inc. (SJR - Free Report) provides cable TV and satellite TV services, as well as high-speed Internet access within North America. The company also has significant interests in interactive TV, e-commerce and telecommunications companies. For 2017 (ended August 2017), the Zacks Consensus Estimate for EPS is pegged at $1.03, indicating year-over-year growth of 4.6%.  In the last 60 days, three analysts upwardly revised their estimates. Long-term (three-five years) expected EPS growth is currently pegged at 5.0%. The Zacks Consensus Estimate for revenues is $4.1 billion, up 4.6% year over year.

BCE Inc. (BCE - Free Report) provides satellite TV communications and direct-to-home TV services, besides offering several other wireline and wireless services including systems integration expertise, e-commerce solutions, Internet access and high-speed Internet services. For 2017, the Zacks Consensus Estimate for EPS is pegged at $2.66, reflecting year-over-year growth of 2.1%.  In the last 60 days, the Zacks Consensus Estimate has gone up by 3 cents as seven analysts upwardly revised their estimates. Long-term (three-five years) expected EPS growth is currently pegged at 3.5%. Meanwhile, the Zacks Consensus Estimate for revenues is $18.3 billion, up 12.4% year over year.

Liberty Global plc. (LBTYA - Free Report) owns interests primarily in broadband distribution and content companies operating outside the United States, primarily in Europe, Asia, and Latin America. By virtue of its subsidiaries and affiliates, Liberty Global is one of the largest cable TV operators in terms of subscribers outside the United States. For 2017, the Zacks Consensus Estimate for EPS is pegged at a loss of 54 cents, reflecting year-over-year decline of 125.7%. The consensus estimate for revenues is approximately $15 billion, down 13.9% year over year.

Solid Charts

The charts below show that all the four above-mentioned stocks have outperformed the industry in the last three months.

The Bottom Line

The strong presence of online video streaming providers is posing significant threat to the existing pay-TV business model. Video offering, which represented the core business function of cable TV operators, seems to be fast slipping out of their hands. In order to remain competitive in the market, pay-TV operators have started offering Internet TV with selected TV channels at cheap rate. Internet TV can be viewed using a broadband connection and mobile gadgets like tablets, smartphones, Roku box and smart TV, to name a few.  At this juncture, we believe that these four stocks with a favourable Zacks Rank are poised to capitalize on the growing opportunities.

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