3 Stocks to Watch From the Challenging Cable Television Industry

The Zacks 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, Charter Communications CHTR and Rogers Communication RCI.

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 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.

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, the 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 cable television industry participants like Comcast and Charter. Improving Internet speed is fueling the demand for high-quality video and the trend of binge viewing. Further, a strengthening broadband ecosystem in international markets, along with the proliferation of smart TVs, is anticipated to drive growth. Also, the surging work-from-home trend and online-learning practice owing to coronavirus-induced quarantines and lockdowns have boosted Internet usage, thus supporting 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 profits of residential video services due to rising programming costs and retransmission fees have 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.

Softness in Advertising Demand Impeding Business Growth: The challenge with TV ads is that marketers have difficulty getting actionable metrics and insights such as attribution data. At this time, marketers must look for outside-the-box solutions to extract conversion data from offline media. TV has taken a secondary role in most marketing strategies due to the growing influence of digital marketing. Many marketers are increasing ad spending on digital mediums due to their unmatched ability to deliver personalized messages that are easy to measure. Cable TV players are set to face competition for ad dollars from streaming service providers like Netflix and Disney, which are raising prices and introducing cheaper ad-supported packages now that their subscriber growth has slowed.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Cable Television industry is housed within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #208, which places it in the bottom 17{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} 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 weak near-term prospects. Our research shows that the top 50{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} of the Zacks-ranked industries outperforms the bottom 50{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} by a factor of more than 2 to 1.

The industry’s position in the bottom 50{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. Since Dec 31, 2021, the industry’s earnings estimate for 2022 has moved down 1.3{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896}.

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 Lags Sector, S&P 500

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

The industry has declined 33.2{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} over this period compared with the broader sector’s decline of 33.1{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896}. The S&P 500 has declined 14.6{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} 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 7.12X compared with the S&P 500’s 12.77X and the sector’s 8.43X.

Over the past five years, the industry has traded as high as 19.3X, as low as 6.23X and at the median of 10.75X, 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 29.1{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} in the past year. The Zacks Consensus Estimate for Comcast’s ongoing-year earnings has decreased 0.6{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} to $3.60 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 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 40.4{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} in the past year. The consensus mark for 2022 earnings has moved south by 0.8{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} to $31.56 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 0.1{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} in the past year. The consensus mark for 2022 earnings has moved down 2.5{38557cf0372cd7f85c91e7e33cff125558f1277b36a8edbab0100de866181896} to $2.75 per share in the past 30 days.

Price and Consensus: RCI

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