Shaw's Long Term Evolution Plans May Be Too "Long-Term" For Some Investors

| About: Shaw Communications (SJR)

Summary

Shaw recently introduced LTE to its re-branded "Freedom Mobile" brand in Vancouver and Toronto.

Freedom Mobile's LTE is not compatible with Apple or Samsung devices.

Freedom customers must purchase LTE plan and LG or ZTE device to access LTE.

Western Canada has recently seen price war among big three carriers.

Shaw faces challenges of waiting for more compatible devices and competitors' seeming willingness to compete on price.

I have recently written about Canada's Shaw Communications Inc. (NYSE:SJR) moves over the past year or so. Specifically, the company, which provides cable TV, and other consumer and business services divested its media assets.

It also purchased the owner of a Canadian wireless carrier, named WIND Mobile, which the company rebranded as "Freedom Mobile" on November 21, 2016. Freedom just launched LTE in the parts of Toronto and Vancouver. According to the company, it plans on further rolling out LTE in the Greater Toronto and Vancouver areas; Southwestern and Southeastern Ontario; Edmonton; and Calgary in 2017.

Since the launch, Freedom's Facebook page post comments have contained numerous complaints that highlight challenges Shaw may face in the short term growing its Freedom Mobile user base, which exceeded 1.04 million subscribers, according to its most recent earnings report.

The First Problem With Freedom's LTE: No Apple Or Samsung

LTE is currently only available in parts of the Greater Toronto and Vancouver areas on the AWS-3 spectrum. The only compatible phones that Freedom currently offers are the ZTE Grand X 4 and the LG V20.

In contrast, Canada's big three competitors, Rogers Communications Inc. (NYSE:RCI); Bell Mobility (a unit of BCE Inc.) (NYSE:BCE); and TELUS Corporation (NYSE:TU) and many of their various brands offer LTE nationwide on a wide variety of devices, including Apple's (NASDAQ:AAPL) iPhone and Samsung (OTC:SSNLF) smartphones.

Freedom does not currently sell any Apple devices for use on its current 3G network (although subscribers are using iPhones on the network.) It does sell Samsung devices, but they are not compatible with Freedom's LTE network.

According to a recent Reuters/Ipsos poll conducted in the United States, 92 percent of iPhone customers said they are likely to purchase another iPhone, and 91 percent of Samsung smartphone owners are likely to purchase another Samsung smartphone.

With loyalty rates that high, Freedom faces an incredible challenge attracting Apple or Samsung users who want LTE speeds, until these companies release new phones that are compatible with Freedom's LTE network.

Potential Increased Churn Of Current Customers

Customers who ported over to the former WIND network or bought another device from WIND now have to buy a new device if they want to use the LTE network. Further they have to subscribe to an LTE plan, which may differ in value proposition than their current plans.

Any customer locked into a contract on the assumption that their phone would have access to LTE once it launched may be unhappy with the carrier. Shaw did not mention a churn rate in its most recent earnings report. It is reasonable to assume that the company's churn rate may increase in the near future, given customers must buy a new phone to access LTE. Simply put, if a customer is going to have to buy a new phone, they may do so from a different carrier, or just port their current phone to another carrier.

Competition Already Heating Up In Canadian Wireless Market In Western Canada

Telus' brand Public Mobile recently had a bring-your-own-device campaign offering $38 (all prices in this article are in Canadian dollars unless indicated otherwise) per month LTE service in British Columbia and Alberta, according to iPhoneInCanada.ca. BCE's Virgin Mobile brand and Rogers' Fido brand quickly countered with $40 plans in Western Canada, according to the site.

As Freedom just launched LTE in Vancouver and currently offers 3G service in Edmonton and Calgary, it may be challenging to grow subscribers whenever the competition engages in price wars.

This also may not be helpful to Freedom churn rates. Customers who switched to the former WIND from a major carrier that had LTE, despite slower 3G service, have already demonstrated a willingness to leave a carrier based on price.

Are Freedom's Plans That Competitive?

As I previously wrote, Shaw indicated in its last conference call that it does not plan to emulate T-Mobile's "Uncarrier" disruptive campaign.

At the time of writing this article, Freedom offers a $40/per month LTE plan for 12 months (discounted from $45) with unlimited calling within non-roaming areas in Canada and the US, and 6 GB of full-speed data in the first year, also in non-roaming areas.

To access the LTE network, the subscriber would have to buy the compatible LG or ZTE phone. At the time of writing this article, the 64GB LG phone is marked down on Freedom's web site to $799 without a two-year contract, or as low as $99, with an additional $25 month added to the bill on a two-year contract. This means this phone and plan would cost $65 per month for 12 months, and $70 per month for the subsequent 12 months, over a two year term, after paying a $99 fee.

The 16 GB ZTE phone costs $99 without a contract, or can be bought for zero down, with $5 per month added to a two-year contract.

In contrast, Telus' brand, Koodo Mobile, at the time of writing, offers a 16 GB iPhone SE for zero down, with a $15 monthly tab on a two-year contract. Koodoo's monthly plans start at $40, offering 1 GB of data. So in this example, the customer pays $55 per month over two years, versus $65 per month (for the first year) on Freedom for an LG phone, or $45 per month (for the first year) for the ZTE phone. While this is only one comparison, if readers compare the various competitors' plans and devices it may not appear certain that Freedom is offering significant carrots to attract new customers.

The Market Continues To Appear To Be Pricing Shaw At A High Multiple

Earnings from continuing operations in the most recent quarter were $0.29 per share, or $1.16 on an annualized basis. The stock currently trades in the $26 range on the Toronto Stock Exchange, which would work out to a multiple of about 22 under that annualized rate. As Shaw's cable subscriptions have been declining, it seems to me that some investors are placing their hopes on significant growth of the company's Freedom Mobile service.

Given the big three's recent demonstration of a willingness to compete on price in Shaw's western backyard, and given that iPhone and Samsung users will have to wait for a new compatible device to use Freedom's LTE network, the reward some investors hope for may take some time.

Conclusion

In the short term, investors may face the risk of higher churn rates due to western Canada price competition. Further, original WIND customers who want LTE speed have to purchase a new phone, and may choose to do so with another carrier.

Shaw closed at $19.74 U.S. on the New York Stock Exchange on December 6, 2016. If we assume Shaw performs as well as its most recent quarter, and obtains an annualized continuing operations EPS of $1.16 Cdn (about $0.87 U.S. at the current exchange rate at the time of writing), and give this stock a historical S&P average multiple of 15, this stock would be worth about $13 U.S. This would represent about a 33 percent decline from current values.

Shaw reported its first quarter results on January 14, 2016. While I have not seen an announcement as to when earnings for the same quarter will be reported in 2017, I would not be surprised to see more price competition before then, especially with the Canadian shopping discount tradition of Boxing Day, on December 26.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author is long puts of Shaw Communications Inc. on the Toronto Stock Exchange. The commentary expressed in this article is not legal advice, nor investment advice, and is subject to Seeking Alpha's Terms of Use. The author does not warrant the completeness or accuracy of the information or calculations within this article.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , CATV Systems, Canada
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here