A few years ago, investors were crazy for cable company stocks, believing that cable had a natural advantage over traditional phone companies when it came to delivering phone, internet, TV and even wireless service in one bundle.
But it's the telecoms that have actually proved the most successful today, as the two sectors compete on each other's traditional turfs. Over the last 12 months, shares of Telus Corp. have gained 17 per cent and BCE Inc. shares are up 12 per cent. In contrast, Rogers Communications' stock has been essentially flat.
In a report entitled "Revenge of the Telcos," Dvai Ghose, an analyst with Canaccord Genuity, argues that even after their recent price run up, telecom stocks are a better investment today than cable company stocks.
"The market was convinced that cable's 'big pipe' advantage was unassailable. It was wrong.
Telus's TV penetration is 24 per cent and expected to reach 45 per cent by the end of 2015," he wrote in the report published Monday.
Telecoms have certainly lost an enormous amount of their traditional land line business over the last decade, but Mr. Ghose says that decline is slowing and the lost revenue is being offset with new services.
At the same time, cable companies are seeing their TV subscriber losses accelerate. Shaw's cable penetration is expected to fall below 50 per cent by the end of 2015, and Rogers, Cogeco Cable and Videotron are reporting deepening cable losses, he says.
In addition, the cable industry's assault on telecoms' core business of phone services has weakened significantly, he adds.
Telecom companies provide better set-top boxes than the cable industry. While the cable industry has more bandwidth, telecoms use their infrastructure more efficiently, he argues.
On the wireless front, Mr. Ghose says Telus and Bell Canada are leading the charge ahead of cable companies. This is important because wireless data is the only real driver of growth in the communications sector.
Both Bell and Telus are taking wireless share from Rogers and they enjoy the huge advantage of a network sharing agreement that splits their costs. Meanwhile, Videotron's wireless results have been disappointing and Shaw lacks an offering that can challenge Telus in Western Canada, he says.
In financial terms, the telecom players have already gone through difficult cost cutting rounds but the cable sector has not been as aggressive on this front.
"Telus and Bell are reporting EBITDA and [free cash flow] growth and reiterating guidance; [Rogers] and Shaw are reporting declines and are finding it tough to achieve guidance," Mr. Ghose writes.
Mr. Ghose's top pick is Telus, given the company's strong balance sheet, robust cash flow from wireless and relatively low dividend. BCE remains "a solid defensive stock in a bear market" with the shares yielding 5.3 per cent. He warns that Rogers balance sheet may not be as strong as many investors think, especially given what the company is likely to invest in the next round of wireless auctions. As a result Rogers' share buybacks could be curtailed, he says.