Cable may look very different over the next few years.
Even saying “the future of cable” may elicit laughs, given that a lot of analysts think the industry as we know it has no future.But whether you call it “cable” or “pay television,” the industry will continue to exist. That doesn’t mean there won’t be changes — clearly, people are at least considering dropping their traditional wired subscriptions or moving to skinny bundles with fewer channels at a lower price — but American consumers still pay for TV.
In fact, while cord-cutting has seemed inevitable, the numbers have been relatively small. The major pay-television providers lost 105,000 subscribers in 2013, another 125,000 in 2014, and then 385,000 last year, according to numbers compiled by Leichtman Research Group. Most, if not nearly all, those who dropped cable added at least one pay-TV streaming service as an alternative.
Cable is a changing world, and parts of it may die, but pay television has a bright future. These are the stocks three of our contributing writers would buy and hold as a way to invest in the future of cable, even if the industry at some point is no longer even described by its delivery technology.
Demitrios Kalogeropoulos: You wouldn’t guess it by looking at the stock’s performance, but Scripps Networks (NASDAQ: SNI) is having a great year. The owner of popular channels such as Food Network, Travel Channel, and HGTV doubled its net income last quarteron a 24% sales boost. All six of its main networks attracted bigger audiences, putting plenty of distance between it and the competition. In fact, Scripps was the only major media company to turn in such a consistently strong result. Advertising sales spiked by 31%overall, adding to the 32%gain in the prior quarter.
The international side of the business continues to improve, as Scripps integrates its purchase of TVN, Poland’s largest media property. International networks now account for 15% of revenue — up from 4% a year ago. As that ratio rises, shareholders should start to see meaningful profit growth contributions from non-U.S. networks that have a long runway of subscriber gains to go.
The company’s distribution fees, a key source of earnings, barely budged in Q1, an unfortunate impact of a slowly dwindling subscriber base for its U.S. cable business. Yet Scripps’ lifestyle brands seem well positioned to survive the disruption of broadcast TV, considering it just posted its strongest advertising growth in five years.
Investors seem to have ignored that good news and instead lumped Scripps in with other broadcasters who aren’t likely to thrive as viewing moves online. At a valuation of just 12 times this year’s profit, Scripps won’t need much to beat Wall Street’s low expectations, providing a decent chance that the stock outperforms in the years ahead.
Steve Symington:With Lions Gate Entertainment (NYSE: LGF) down more than 40% year to date, I think now is a great time for investors to pick up shares of the TV and movie giant.
Just last week, Lions Gate made official its long-rumored merger of equals with Starz (NASDAQ: STRZA)(NASDAQ: STRZB), announcing a $4.4 billion deal to acquire the premium cable channel. And though shares of Lions Gate initially jumped in the double-digit percentage range following the news, they’ve since pulled back to trade at their lowest levels since the company revealed painful fourth-quarter 2015 resultsin early February, driven by an underwhelming box-office haul from its fourth and final Hunger Games film.
But though management admitted that last year’s film segment performance was disappointing, its content production studio continues to outperform as record television segment revenue helped the company significantly exceed expectations last quarter, all while management hinted at plans for more partnerships with third-party distributors and digital video platforms. CEO Jon Feltheimer alsoinsisted during last quarter’s call that “this year’s [movie] slate is bigger [and] more balanced and is expected to generate greater profitability.”
Meanwhile, Lions Gate anticipates that its merger with Starz will close by the end of this year, after which Feltheimer says the combination should be “highly accretive, generate significant synergies, and create a whole that is greater than the sum of its parts.” With the combined companies boasting a 16,000-title film and television library, a promising feature-film business, and what will be the largest independent television business in the world with 87 original series on 42 U.S. networks, thisforward-looking television and cinema content juggernaut is a great way for investors to take advantage of the future of cable.
Daniel B. Kline: DISH Network (NASDAQ: DISH) has the perfect one-two punch for the changing cable world, which should make it an acquisition target. The satellite provider already serves as a lower-cost alternative to a full-price cable package. In much of the U.S., where true competition doesn’t exist, satellite serves as the only choice for people who would rather minimize their exposure to the local cable and internet provider.
In addition to its satellite packages, DISH also owns Sling TV, a streaming skinny bundle of cable channels. While there are other players in the space, and more rumored to come, DISH has first-mover advantage, and it also has a well-positioned offer, with its deal of $20 for roughly 25 channels. This makes cutting the cord less scary for consumers, as they can drop their cable bill while still keeping access to the top channels, including TBS, TNT, ESPN, Cartoon Network, and more.
DISH has also made Sling a sort of a la carte cable alternative by offering a number of specialty add-ons such as more news, sports, or family channels for $5 for each package. The streaming service also offers HBO.
So far, Sling has been a mild annoyance for the industry. DISH doesn’t report subscriber numbers for Sling, but back in February The Wall Street Journalsaid it was over 600,000. That number has climbed since then, while DISH has lost satellite subscribers. Going forward, it could become a major thorn in its side. That becomes even more of a threat if the company partners with or is acquired by a cable-adjacent player.
Perhaps that would be Verizon or T-Mobile, sinceAT&T already owns DirecTV, or maybeSony (NYSE: SNY), which has a rival streaming service and is priced a lot like traditional cable. DISH remains one of the few attractive players on the board, and it’s well positioned to succeed in the new cable world on its own, or as part of something bigger.
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Daniel Kline has no position in any stocks mentioned. Demitrios Kalogeropoulos has no position in any stocks mentioned. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Lions Gate Entertainment and Verizon Communications. The Motley Fool recommends Scripps Networks Interactive, Starz, and T-Mobile US. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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