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Why Is Shaw (SJR) Down 0.4% Since Last Earnings Report?

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It has been about a month since the last earnings report for Shaw Communications (SJR). Shares have lost about 0.4% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Shaw Communications Q1 Results Drive on Wireless Growth

Shaw Communications reported adjusted earnings from continuing operations of 23 cents per share, which lagged the Zacks Consensus Estimate by 17.9%. Moreover, total revenues of $1.05 billion missed the consensus mark of $1.06 billion.

In Canadian currency, the company reported adjusted earnings of C$0.31 per share, down 13.9% year over year. However, total revenues increased 2.1% to C$1.38 billion.

Segment Details

Wireline revenues (77.2% of total revenues) decreased 1.5% on a year-over-year basis to C$ 1.07 billion.

Wireline - Consumer revenues fell 2.2% to $924 million. Growth in Internet revenues was fully offset by declines in Video, Satellite and Phone revenues.

Wireline - Business revenues grew 3.6% to $143 million. Segment results reflected continued growth in Internet revenues and demand for the SmartSuite of business products.

Wireless revenues (23% of total revenues) rose 16.9% on a year-over-year basis to C$318 million.

Wireless - Service revenues (61.6% of total revenues) were up 18.1% from the year-ago quarter to $196 million, primarily driven by higher revenue generating units (RGUs) or subscribers and improved penetration of Big Gig data plans.

Average billing per subscriber unit (ABPU) grew 4.5% year over year to C$43.60, driven by increased number of customers subscribing to higher service plans. ARPU rose 1% from the year-ago quarter to C$38.76.

Wireless - Equipment revenues (38.4% of total revenues) increased 15.1% year over year to C$122 million. Segment revenues benefited from a higher number of customers who bought devices through Freedom Mobile.

Subscriber/RGU Details

Wireline RGUs declined almost 57,500 in the reported quarter compared with a loss of roughly 52,800 in the year-ago quarter.

In the Wireline - Consumer segment, the video cable lost 13,948 subscribers in the three months ended Nov 30, 2019. Video satellite customer count declined 31,875. Phone lines lost 26,178 customers. However, Shaw Communications’ Wireline - Internet business gained 5,648 customers in the quarter.

In the Wireline - Business Network Service segment, the video cable gained 1,622 customers in the quarter. Moreover, Video satellite customers grew 2,333. Further, the company gained 4,253 phone customers and 694 Internet customers.

In the Wireless Segment, Shaw Communications added 57,900 net RGUs. While the company added 66,900 post-paid subscribers, it lost 9,000 pre-paid customers.

Post-paid addition reflected continued demand for the Big Gig data centric and Absolute Zero pricing and packaging options. However, a higher churn rate due to stiff competition negatively impacted the pre-paid subscriber base.

Post-paid churn of 1.50% in the reported quarter was higher than 1.28% in the year-ago quarter.

Notably, the company now serves approximately 18 million people, almost half of the Canadian population. Moreover, Freedom Mobile’s total wireless customer base increased to more than 1.7 million customers.

The company’s wireless service is now available in more than 700 locations, courtesy of partnerships with retailers like Loblaws’ “The Mobile Shop”, Walmart and Mobilinq.

Operating Details

In first-quarter fiscal 2020, operating, general & administrative expenses decreased 1.9% year over year to $795 million. Operating, general & administrative expenses, as a percentage of revenues, decreased 230 basis points (bps) to 57.5%.

Notably, almost 370 employees exited the company in the quarter due to the voluntary departure program (VDP) under the Total Business Transformation (TBT) initiative.

Adjusted EBITDA grew 8.1% year over year to $588 million. Adjusted EBITDA margin expanded 810 bps on a year-over-year basis to 42.5%.

Excluding a $38-million negative impact related to the adoption of IFRS 16 (Leases), adjusted EBITDA grew roughly 1.1% year over year.

Segment-wise, Wireline adjusted EBITDA increased 3.4% to $517 million owing to lower expenses of roughly C$21 million (positive impact of IFRS 16 adoption). Wireline segment adjusted EBITDA margin expanded 230 bps on a year-over-year basis to 48.5%.

Wireless adjusted EBITDA jumped 61.4% to $71 million, primarily owing to lower operating expenses of roughly $17 million (positive impact of IFRS 16 adoption) and higher service revenues. Wireless segment adjusted EBITDA margin expanded 620 bps on a year-over-year basis to 22.3%.

Balance Sheet & Cash Flow Details

As of Nov 30, 2019, Shaw Communications had cash of $132 million compared with $1.44 billion as of Aug 31, 2019.

Cash decreased primarily due to the repayment of $1.25 billion of senior notes and other financing activities as well as cash outlays for investments.

Further, the undrawn bank credit facility was $1.5 billion.

Moreover, as of Nov 30, 2019, the company’s net debt leverage ratio was 2.5x, within management’s optimal range of 2.5x-3x.

In the quarter, capital expenditures were $260 million compared with $271 million reported in the year-ago quarter.

Wireline capital spending was flat year over year. Wireless spending decreased roughly $11 million year over year. However, the company continued to spend on the deployment of 700 MHz spectrum and expansion of the wireless network into new markets.

Free cash flow was $183 million compared with $163 million in the year-ago quarter. Lower capital expenditure and cash taxes primarily led to the improvement.

Guidance

For fiscal 2020, Shaw Communications expects adjusted EBITDA to grow between 11% and 12% year over year.

Capital investments are expected to be $1.1 billion, while free cash flow is likely to be $700 million.

The company expects to complete the VDP in fiscal 2020 and is on track to achieve the anticipated annualized savings of $200 million (approximately $125 million attributable to operating expenses and $75 million attributable to capital expenditures).

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -9.52% due to these changes.

VGM Scores

Currently, Shaw has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, 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. Notably, Shaw has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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