Shaw is feeling some competitive heat but it is still expected to show strong growth when it posts quarterly results Wednesday.
Until recently, the Calgary-based company has faced limited competition in the cable and Internet service business in Western Canada. But Telus is ramping up its television offerings and striking back at Shaw, which has been poaching residential phone customers from the country's second-largest phone company for several years.
After an extensive period of testing, Telus is now speeding up deployment of its TV service over phone lines, adding 62,000 customers in its previous two quarters. In addition, the company signed a distribution deal with BCE Inc.'s Bell Canada last year to sell Bell's satellite TV service under its own brand in Western Canada. The moves give Telus the ability to sell customers discounted bundles of phone, wireless, Internet and TV services.
So far, Shaw is standing up well to its new competition, thanks partly to smart infrastructure investments that have enabled it to attract customers to upgraded digital services. While the company has been losing a relatively small number of basic cable TV subscribers, those losses have been far outpaced by gains in digital services. In the first six months of its fiscal year, for example, Shaw says it increased digital TV subscribers by more than 10 per cent to 1.5 million, Internet accounts by 4 per cent to 1.8 million and phone subscribers by 13 per cent to 978,000.
Analysts expect that, even with the added competition, Shaw will post profit for the three months ended May 31 of $147.1-million on revenue of $949-million, representing growth of more than 10 per cent from the year-earlier period.
Telus's expansion, plus a rapidly changing communications market, is forcing Shaw to make some big bets over the next few years that will eat into its appealing cash flow. Shaw has said it will spend about $100-million on building its wireless business in the last half of its fiscal year ending Aug. 31. The company also agreed this year to purchase CanWest Global Communications Corp.'s television assets with a cash investment of $1.2-billion, plus the assumption of $850-million of CanWest's debt.
While many have questioned the need for Shaw to own its own content, Jim Shaw, chief executive officer and vice-chairman of the company, told analysts on a conference call last month that consumer habits and the growth of video-on-demand programming have made ownership and access rights to programming more important.
Dvai Ghose, an analyst with Canaccord Genuity Corp., noted in a research report last week that the fundamentals are changing for Shaw.
"Shaw was traditionally an appealing stock due to its attractive combination of top-line and dividend growth. However, revenue growth seems set to decelerate due to competition and maturation. In addition, due to cash taxes and wireless expansion, Shaw's $350-million recurring [free cash flow] guidance for [fiscal]2010 is below annual dividend payments of $380-million," he wrote.
Mr. Ghose rates Shaw shares a "hold" and has a target of $19 on the stock. Shaw's board approved a 5-per-cent dividend hike in January.
Jonathan Allen, of RBC Dominion Securities Inc., says Shaw's numbers have proven resilient during the economic downturn, and the company has good long-term growth prospects thanks to its push into digital TV and expected launch of wireless services. But he thinks the stock is "priced close to perfection." He rates the shares "sector perform" and has a $24 price target on them.
The stock closed down 17 cents at $19.13 on the Toronto Stock Exchange on Tuesday, giving the shares a yield of 4.6 per cent. They are off 12 per cent since the start of the year but up 2 per cent over the last 12 months.