Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Netflix CEO Reed Hastings shows off their new set top box at Netflix headquarters in Los Gatos, Calif., Friday, May 16, 2008. (Paul Sakuma/AP)
Netflix CEO Reed Hastings shows off their new set top box at Netflix headquarters in Los Gatos, Calif., Friday, May 16, 2008. (Paul Sakuma/AP)

Eye on Equities

Netflix deal a new threat to Canada's pay-TV operators Add to ...

Netflix Inc.'s swipe at the pay-TV business by signing a multiyear deal this week with Paramount Pictures could have some significant implications down the road for Canada's pay and specialty television operators.



Netflix now has the rights to show all of the studio's new releases in Canada before any television channels. It's the first exclusive deal for newer content on the streaming-video subscription service, best known for showing movies and television shows well past their initial airing date.

More related to this story



Pay television operators Astral Media Inc. and Corus Entertainment Inc. couldn't come to an agreement with Paramount on pricing during recent re-negotiations and dropped the studio from the pay lineup, according to RBC Dominion Securities Inc. analysts Drew McReynolds and Haran Posner.



This wouldn't be without precedent. Astral and Corus rarely sign up all the studios due to limits on foreign content scheduling as well as the need to control programming costs. But the consequence now is allowing these new so-called "over-the-top" (OTT) services a stronger foothold in Canada.



"In the near term, we believe that the impact of OTT services on the television system in Canada will be limited to the impact of negative sentiment on valuation with no material impact on earnings," said Mr. McReynolds.



But in three to seven years' time, higher programming costs due to increased buying power from OTT services are likely to impact broadcasting margins, he warned.



And the risks, he said, become magnified in the long term. "As OTT services secure more premium programming rights, Internet-enabled television reaches greater than 50 per cent household penetration, and the cost of broadband sufficiently declines, we believe OTT services would become a legitimate substitute for cable and satellite television."



To reflect increased margin risks over the medium term, RBC lowered its target enterprise value/earnings before interest, taxes, depreciation and amortization multiple for pay and specialty television firms to 8 times from 8.5 times.



Downside: RBC cuts its price target on Corus by $1 to $26 and on Astral Media by $1 to $45. Corus is rated as a "top pick-average risk" and Astral "outperform-average risk."



Dealers in the oil sands are seeing significant increases in new equipment sales as projects get the go-ahead and customers become more confident to make orders, even with longer lead times, RBC Dominion Securities said after conducting dealership channel checks. This bodes well for Finning International Inc. meeting or exceeding its 10 per cent top line growth target, said analyst Sara O'Brien.



Upside: Ms. O'Brien rates the Caterpillar equipment dealer as an "outperform-average risk" with a $33 target price.



Precision Drilling Corp. shares have been on a sharp upward trajectory, rising nearly 20 per cent since March 10. While most of the major Canadian contract drillers have seen significant share price gains, Precision is the most fully valued of the drillers covered by Raymond James Ltd. analyst Andrew Bradford. Meanwhile, Precision's acquisition of two U.S.-based directional drilling companies Tuesday will help the company build out its business in the U.S., but it won't be a material addition for Precision in terms of cash flow contributions, he said.



Downside: He downgraded the stock to "market perform" from "outperform" but raised his target price by 50 cents to $13.



Husky Energy Inc. has a well communicated growth strategy, but TD Newcrest analyst Menno Hulshof believes the market is unlikely to bid up its shares in the near term for any associated upside. He also warns that Husky's $1.20-per-share annual dividend may not be sustainable post-2012, when its dividend reinvestment plan expires and causes cash outflows to spike.



Downside: Mr. Hulshof downgraded Husky to "hold" from "buy" but raised his target price by $1 to $32 to reflect new commodity price assumptions.



Daylight Energy Ltd. "has taken a number of transformative steps" over the last 18 months, including acquisitions that have increased its inventory of crude oil drilling prospects and property sales that have improved its balance sheet, said TD Newcrest analyst Roger Serin. It has also slowed development of its Deep Basin Cadomin and Nikanassin natural gas plays because of low prices for that commodity.



Upside: Mr. Serin upgraded Daylight to a "buy" from a "hold" and raised his target price by $2 to $13.



Dealers in the oil sands are seeing significant increases in new equipment sales as projects get the go-ahead and customers become more confident to make orders, even with longer lead times, RBC Dominion Securities said after conducting dealership channel checks. This bodes well for Finning International Inc. meeting or exceeding its 10-per-cent top line growth target, said analyst Sara O'Brien.



Upside: Ms. O'Brien has a $33 target price on the stock.





Follow on Twitter: @eyeonequities

 

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories