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Why Is Shaw (SJR) Down 0.6% Since Last Earnings Report?

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A month has gone by since the last earnings report for Shaw Communications (SJR - Free Report) . Shares have lost about 0.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Shaw due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Shaw Communications Q2 Results Drive on Wireless Growth

Shaw Communications reported second-quarter fiscal 2019 adjusted earnings from continuing operations of 23 cents per share, beating the Zacks Consensus Estimate by a penny. However, total revenues of $987.7 million lagged the consensus mark of $1.03 billion.

In Canadian currency, the company reported adjusted earnings of C$0.30 per share against the year-ago quarter’s loss of C$0.35. Total revenues declined 1% to C$1.32 billion.

Segment Details

Wireline revenues (81.4% of total revenues) increased 0.5% on a year-over-year basis to C$ 1.07 billion.

Consumer revenues remained almost unchanged at $923 million. Higher contributions from rate adjustments and growth in Internet revenues were negated by declines in Video, Satellite and Phone subscribers and revenues.

Business revenues increased 5.7% to $148 million, driven by continued demand for the SmartSuite of business products.

Wireless service revenues (12.8% of total revenues) rallied 26.1% from the year-ago quarter to $169 million, primarily driven by higher post-paid revenue generating units (RGUs) or subscribers. Improved penetration of Big Gig data plan drove top-line growth.

Average billing per subscriber unit (ABPU) increased 7.5% to $41.34, driven by increased number of customers subscribing to higher service plans and purchasing a device through Freedom Mobile.

Wireless Equipment revenues (12.8% of total revenues) declined 40% year over year to $78 million.

Subscriber/RGU Details

In the Wireline-Consumer segment, the video cable lost 28,953 subscribers in the three months ended Feb 28, 2019. Video satellite customer count declined 9,627. Phone lines lost 20,916 customers. However, Shaw Communications’ Wireline Internet business gained 11,105 customers in the quarter.

In the Wireline-Business Network Service segment, the video cable lost 1,465 customers in the quarter. However, Video satellite customers grew 830. Further, the company gained 5,836 phone customers but lost 1,440 Internet customers.

In November 2018, Shaw Communications doubled Internet speed for its top residential tiers. Recently, the company introduced Shaw BlueCurve, a platform to support the launch of additional broadband services. The BlueCurve Home app is developed in partnership with Comcast and available with Shaw’s BlueCurve Gateway modem.

Shaw Business customers will benefit from faster speed on eligible Business Internet and SmartWiFi 150 and 300 plans moving to 300Mbps and 600Mbps, respectively. In March 2019, Shaw Business also announced the launch of gigabit download speeds for business customers.

In the Wireless Segment, Shaw Communications gained 64,670 post-paid subscribers but lost 16,887 pre-paid customers.

Total Freedom Mobile customer base was more than 1.5 million at the end of February 2019. As part of its network expansion plans for fiscal 2019, Shaw Communications launched wireless services in several new markets, including Victoria and Red Deer on Feb 8, and an additional six communities in Eastern Ontario in March.

Average Revenue per Subscriber Unit (ARPU) increased 3.5% year over year to $37.58. Moreover, wireless post-paid churn improved from 1.66% to 1.36% on a year-over-year basis.

Shaw Communications’ wireless service is available in 240 locations, through national retail partners, Loblaws’ “The Mobile Shop” and Walmart. The company has also finalized an agreement with its third national retail partner, Mobilinq. Shaw Communications expects to launch pre-paid services across 50 additional locations, beginning in April.

Freedom Mobile will continue to launch in new markets throughout fiscal 2019, primarily Western Canada. Combining the existing corporate and dealer store network, Freedom Mobile expects to have more than 650 retail locations operational at the end of 2019.

Notably, the company now serves approximately 16 million people or almost half of the Canadian population.

Operating Details

In second-quarter fiscal 2019, operating, general & administrative expenses decreased 9.3% year over year to $767 million. Operating, general & administrative expenses as percentage of revenues decreased 540 basis points (bps) to 58.3%.

Notably, almost 200 employees exited the company in the quarter, due to the voluntary departure program (VDP) under the Total Business Transformation (TBT) initiative. This led to operating cost reductions of approximately $27 million and capital cost reductions of approximately $6 million.

Operating income before restructuring costs and amortization increased 13.7% year over year to $549 million. Operating margin expanded 540 bps from the prior-year quarter to 41.7%.

Segment wise, Wireline operating income increased 6.9% to $497 million. Wireline segment operating margin expanded 280 bps to 46.4%, primarily due to positive effects of the VDP.

Wireless operating income jumped 188.9% to $52 million, primarily owing to higher ABPU and ARPU. Wireless segment operating margin was 21.1% up from 6.8% in the year-ago quarter, primarily due to margin pressure from significantly higher equipment sales.

Capital Expenditures & Free Cash Flow

In the second quarter, capital expenditures remained flat year over year at $279 million. Wireline capital spending decreased roughly $30 million, primarily due to lower investment on network upgrades.  

Wireless spending increased almost $28 million year over year due to continued deployment of 700 MHz spectrum and expansion of the wireless network into new markets.

Free cash flow was $160 million compared with $124 million in the year-ago quarter.

Guidance

Shaw Communications reiterated its operating income before restructuring costs and amortization guidance for fiscal 2019, which is expected to grow between 4% and 6% from fiscal 2018.

Capital investments are expected to be approximately $1.2 billion, while free cash flow is likely to be roughly $500 million.

Management expects $140 million of operating and capital savings in fiscal 2019 related to TBT initiatives.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Shaw has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Shaw has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.




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