* All data are as of the close of Friday, November 28, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
CATV Systems is an ambiguous industry in so much as it is classified as consumer discretionary while offering products and services that consumers will rarely go without even in the worst of economic times, as you might expect from a staple. During hard economic times, consumers are more likely to park their vehicles to save money than disconnect their TVs.
This was clearly seen during the last major market downturn from mid 2007 until market bottom in early 2009, where two of the three largest U.S. companies in the CATV Systems industry - Time Warner Cable Inc. (TWC), and Dish Network Corp. (NASDAQ:DISH) - dropped like stones as discretionaries would, while the largest of the three - DirecTV (DTV) - morphed itself into something almost recession-proof and performed much like a staple.
During that time, where the broader market S&P 500 index (black) fell 56% and the SPDR Consumer Discretionary Sector ETF (NYSEARCA:XLY) (blue) which the industry belongs to fell 60%, DISH (orange) and TWC (purple) fell an atrocious 78% and 83% respectively. Meanwhile, DTV (beige) managed to outperform all, even the broader market itself, with a drop of only 20%.
Yet once the economy revived, all three performed true to their discretionary heritage, with the laggards who previously fell the most turning around the most, as graphed below.
Since the economic recovery began in March of 2009, where the broader market S&P has gained some 205% and the XLY has gained 345%, DTV has risen 355% where TWC and DISH have surged 635% and 755% respectively.
On an annualized basis, where the S&P has averaged 36.18% and the XLY has averaged 60.88%, DTV has averaged 62.65%, TWC has averaged 112.06%, while DISH has averaged an outstanding 133.24% per year!
Looking forward, the CATV Systems industry as a whole looks poised to continue surging ahead of the broader market as tabled below, where green indicates outperformance and yellow denotes underperformance.
Over the next quarter, the industry's earnings are expected to grow at some 3.81 times the broader market's average, before settling to a calmer but still robust 2.85 times growth rate, on its way to a more sustainable 1.70 times over the next five years.
Zooming-in a little closer, however, the three largest U.S. CATV Systems companies are expected to struggle keeping up with the broader market with a couple of exceptions here and there, as tabled below.
While all three companies are expected to underperform the broader market over the immediate term, DISH and to a lesser extent DTV are both seen delivering earnings shrinkage this quarter.
The struggles are seen continuing in 2015 and beyond, with DISH being the only one to outgrow the market in 2015, and TWC being the only stand-out over the next five years.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, DTV posted the greatest revenue growth while TWC posted the greatest earnings growth year-over-year. At the slow end of the scale, TWC and DISH split the slowest growth between them, with all three companies reporting earnings shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, TWC operated with the widest profit and operating margins, while DISH contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, DTV's management team delivered the greatest returns on assets, while DISH's team delivered the lowest.
Since DTV's return on equity is not available, the metric will not factor into the comparison.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, DTV provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while DISH's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, DTV's stock is the cheapest relative to forward earnings, while TWC's is cheapest relative to 5-year PEG. At the overpriced end of the scale, DISH's stock is the most overvalued overall.
Since DTV's price to company book value is not available, the metric will not factor into the comparison.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, DTV offers the highest percentages of earnings over current stock price for all time periods, while DISH offers the lowest percentages in all periods.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, TWC offers the greatest growth this quarter and over the next five years, while DISH offers it next quarter and in 2015. At the slow end of the spectrum, DISH offers the slowest growth this quarter, while DTV offers it next quarter, in 2015 and over the next five years, with both DTV and DISH suffering earnings shrinkage this quarter.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe DTV's stock offers the least upside potential and least downside risk, while TWC's stock offers the greatest upside and DISH's offers the greatest downside.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, TWC is best recommended with 4 strong buys and 5 buys representing a combined 45% of its 20 analysts, followed by DISH with 6 strong buy and 5 buy recommendations representing 44% of its 25 analysts, and lastly by DTV with 2 strong buy and 2 buy ratings representing 17.40% of its 23 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Time Warner Cable with a super high speed victory, outperforming in 13 metrics and underperforming in 4 for a net score of +9, followed far behind by DirecTV, outperforming in 10 metrics and underperforming in 7 for a net score of +3, with Dish Network completely disconnected from its peers, outperforming in 6 metrics and underperforming in 19 for a net score of -13.
Where the CATV Systems industry is expected to outperform the S&P broader market substantially next quarter, significantly in 2015, and meaningfully beyond, the nation's three largest companies in the space are expected to struggle against the broader market for the most part, with just the two exceptions of DISH in 2015 and TWC over the next five years.
Yet after taking all company fundamentals into account, Time Warner Cable flashes more green blinking lights than its peers, given its lowest stock price to 5-year PEG, widest profit and operating margins, highest EBITDA over market cap and revenue, highest trailing earnings growth, highest future earnings growth overall, highest dividend, best high and mean price targets, and most analyst buy recommendations - decisively winning the CATV Systems industry competition.