Canadian cable company stocks suffered setbacks during the recent wireless auction, which fed concerns that new competition would erode their profits. Rogers Communications Inc., in particular, has seen its shares wilt 24 per cent from their high point last year.
But according to Vince Valentini, an analyst at TD Securities, cable companies are winning the subscriber battle against rival telecommunications companies, which makes them compelling buys.
"What we see is a picture of total domination by the cablecos," he said in a note to clients. "We have to go back to the third quarter of 2003 to find a period where the telcos added more revenue generating units than the cablecos in Canada."
Take Internet subscribers. In the second quarter, Canadian cable companies added 67 per cent more high-speed data subscribers than telcos did.
At the same time, telco executives have boasted that they can win market share in digital video subscribers because their satellite video platform does not have a cumbersome legacy analog network to support, unlike the cable companies.
However, Mr. Valentini believes that the telcos are not delivering on this vision. He noted that the cable industry added 95,000 digital video subscribers over the past quarter, or more than seven times the number added by the telcos. Over the past three years, the cable companies added nearly 1.6 million digital customers, against only 292,000 for the telcos.
This dominance could be a problem, since it may force telecommunications companies to step up the competition. If the telcos decide to spend big bucks on their networks to make them more competitive with cable, by upgrading them to the faster FTTH (fibre to the home), cable stocks could come under pressure, at least in investor sentiment. Mr. Valentini said that an upgrade announcement from the telcos could come as early as next year.
In the meantime, he has "buy" recommendations on Rogers Communications, Shaw Communications Inc., Cogeco Cable Inc. and Quebecor Inc. (which owns Vidéotron Ltée), with estimated returns ranging from a low of 20 per cent (Shaw) to a high of 49 per cent (Rogers).