Cogeco banks on business services

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Cogeco Cable Inc.'s diversification and acquisition strategy continues to serve the company well.

At the same time, Montreal-based Cogeco's core cable business – like that of other players – is experiencing the disruptive impact of new technologies such as Netflix. And rivals such as BCE Inc.'s Bell Media unit represent a growing threat with increasingly popular offerings such as Fibe TV, an Internet protocol television offering.

For Cogeco president and chief executive officer Louis Audet, the challenge is to find ways to fend off these incursions onto its legacy cable turf while also fighting the erosion of its cable subscriber base as well as building on high-growth units such as data services provider Peer 1.

The unveiling of second-quarter profit Wednesday after markets close, followed by a conference call with analysts the following day, should provide some insight into how well those challenges are being met.

Macquarie Capital Markets Canada Ltd. analyst Greg MacDonald expects most of the cable growth in the quarter to come from Cogeco's U.S. operations.

The company bought Atlantic Broadband – which operates in Pennsylvania, Florida, Delaware, Maryland and South Carolina – for $1.36-billion (U.S.) in 2012 and the deal has so far proved to be a good one.

The new growth driver at Cogeco, though, is business services – which includes Peer 1 – Mr. MacDonald said in a recent research note.

"We estimate revenue and EBITDA [earnings before interest, taxes, depreciation and amortization] to grow in the 10-to-20-per-cent range for 2014 and consider this segment to have the best potential to beat estimates," he said.

Scotia Capital Inc. analyst Jeff Fan agrees that business services had a strong second quarter, but he also sees revenue growth at Atlantic Broadband of 9.4 per cent year over year, driven mostly by a strong U.S. dollar.

But he adds that subscriber declines in Canadian cable should be offset by the company's focus on rate increases and upgrades to higher-tier services.

Canaccord Genuity analyst Dvai Ghose anticipates a net loss of 9,300 Canadian cable subscribers in the second quarter, although EBITDA should increase by 2.8 per cent.

He points out that shares in family-controlled Cogeco – the country's fourth-largest cable company – have strongly outperformed those of its rivals in the year to date.

The consensus analysts' earnings-per-share estimate for the quarter is $1.11 (Canadian), up from $1.05 in the year-earlier period.