Zacks’ cable TV industry is benefiting from the surge in demand for broadband driven by coronaviruses. The increase in media consumption due to pandemic-induced closures and home shelter guidelines has been a key catalyst for industry participants like Comcast (CMCSA – Free report), Communication of the Charter (CHTR – Free report) and DISH Network (PLATE – Free report).
Further, a focus on providing bundled offerings and on-demand programming content that responds to changing consumer behavior bodes well for industry players. However, cord cuts are increasing due to increased competition from over-the-top service providers like Netflix (NFLX – Free Report), Hulu, HBO Max, Amazon prime video, and Peacock.
Zacks’ cable television industry primarily consists of companies that provide integrated data, video and voice services. Industry players like Comcast offer pay television services, including streaming content over the Internet. DISH Network supplies equipment such as satellite dishes, digital decoders and remote controls. Typically, cable companies build their own backbone network or lease physical access to the backbone network from telecommunications companies. These companies purchase licenses to provide subscribers with access to cable television channels owned by programmers and distributed over the backbone network. Cable companies also sell commercials on their channels. The industry requires high investment spending on infrastructure to improve its services. The industry is heavily regulated by the Federal Communications Commission (FCC).
4 trends shaping the future of the cable industry
Skinny packages, original growth-boosting content: Cable TV’s ability to generate ad revenue outside of traditional TV platforms, such as websites and any digitally consumed platform, provides greater reach for targeted advertising. Nevertheless, the unfavorable attitude of consumers, especially towards advertising, has hit industry players hard. In addition, the growing consumer preference for digital and subscription services instead of linear pay TV and outright rental or purchase has forced industry players to change their business models. Cable TV companies now offer a variety of alternative packages, including skinny packages, which come at lower costs than traditional offerings. These companies are also innovating in terms of original content to be competitive with streaming service providers.
Key catalyst for high-speed internet demand: The growing demand for high speed internet, including broadband, has helped cable television industry participants like Comcast and Charter. Improved internet speed is fueling the demand for high quality videos and the tendency for excessive viewing. In addition, the strengthening of the broadband ecosystem in international markets, as well as the proliferation of smart TVs, is expected to drive growth. In addition, the growing trend of working from home and e-learning practice due to coronavirus-induced quarantines and lockdowns has boosted internet use, which is supporting industry participants.
Cord cutting and changes in the pay TV industry are hurting prospects: The cable television industry is witnessing the rapid evolution of distribution platforms as well as the adoption of new players and advanced technologies. The declining profitability of residential video services due to rising programming costs and retransmission fees has made it difficult for traditional businesses to survive. Additionally, the growing need for on-demand content has led to the proliferation of streaming service providers like Netflix, Hulu, HBO Max, and Amazon prime video. This has made it particularly difficult for traditional cable TV companies to maintain a viewer base. In addition, the traditional pay television industry is maturing with widespread consolidation. In addition, residential voice service revenues are declining due to the increasing shift to wireless voice services.
Coronavirus outbreak hampers business growth: The coronavirus crisis is having a major impact on the US economy, leading to massive job losses and, in turn, prompting further cord cuts. Small and medium-sized businesses are the most affected by the pandemic. The substantial exposure of cable companies to this cohort is embarrassing for investors.
Zacks’ Industry Rankings Shows Bright Prospects
Zacks ‘cable TV industry is part of Zacks’ larger consumer discretionary industry. It holds a Zacks Industry Rank # 108, which places it in the top 43% of over 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average of the Zacks Rank of all member stocks, indicates good prospects for the near term. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
Before we feature a few stocks that you might want to consider for your portfolio, let’s take a look at the recent stock market performance and industry valuation.
Industry outperforms sector, lagging behind S&P 500
Zacks ‘cable TV industry has outperformed Zacks’ broader consumer discretionary sector, but has lagged the S&P 500 composite over the past year.
The industry grew 29.6% during this period compared to the 12.4% increase for the industry as a whole. The S&P 500 climbed 30% over the same period.
One-year price performance
Current industry assessment
Based on the 12-month EV / EBITDA, a multiple commonly used to value cable companies, we see that the industry is currently trading at 14.06X versus the S&P 500’s 16X and the industry’s 16.05X.
Over the past five years, the industry has traded up to 14.06X, up to 9.97X, and the median of 12.05X, as shown in the chart below.
EV / EBITDA ratio (TTM)
3 cable stocks to monitor
Comcast: The Philadelphia, PA-based company benefits from an expanding broadband subscriber base and strong momentum in the wireless business, outside of ad revenue growth. Its strategy of providing affordable high-speed internet plays a central role in providing connectivity and improving the customer experience. In addition, the increase in media consumption due to the coronavirus and the surge of work from home and e-learning bodes well for Comcast’s internet business. Its streaming service, Peacock, has grown in popularity in a short time and is a key catalyst in boosting broadband sales.
The shares of this company Zacks Rank # 3 (Hold) have risen 13.6% in the year so far. Zacks’ consensus mark for Comcast’s annual earnings rose 3.7% to $ 3.10 per share in 30 days.
Price and consensus: CMCSA
Communication of the Charter: This Zacks Rank # 3 business is benefiting from growing Internet and mobile revenues, and consistent customer gains. Internet revenue is growing thanks to a strengthened customer base, promotional rollouts and price adjustments. Charter continues to witness strong internet usage due to the coronavirus-induced work-from-home and e-learning routine. The company’s broadband service has gained traction among small and medium-sized businesses and businesses. Additionally, a growing mobile subscriber base is a key enabler.
Shares of the Stamford, CT-based company are up 19.8% year-to-date. The consensus mark for 2021 earnings has risen 5.2% to $ 20.87 per share in the past 30 days.
Price and consensus: CHTR
DISH Network: The company’s focus on acquiring and retaining subscribers, which will pay off in the long run, is expected to fuel growth. Additionally, DISH’s partnership with Qualcomm, Aviat, Everstream, Segra, Uniti, Zayo, Mavenir, Fujitsu, Altiostar, VMware and MATRIXX Software for its standalone 5G network is a key enabler. Additionally, it has partnered with Crown Castle for wireless towers. These initiatives bode well for DISH’s long-term revenue growth.
Englewood, CO-based DISH has returned 33.6% year-to-date. Zacks’ consensus estimate for this Zacks Tier 3 company earnings for the current year has risen 6.3% north to $ 3.70 a share in the past 30 days.
Price and consensus: DISH