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Analysts expect Shaw's subscriber base continued to erode in latest quarter

TORONTO - Shaw Communications (TSX:SJR.B) is fighting an uphill battle according to analysts, who say its heavy reliance on television puts it at a disadvantage to other telecommunications companies that also offer wireless services.

The Calgary-based company is expected to report Thursday an improvement on the three previous quarters, but opinion is split on whether the third quarter will be a blip or signal a return to growth.

Canaccord Genuity analyst Dvai Ghose writes that he's got a "sell" rating on Shaw stock even though a corporate reorganization announced in April will probably improve efficiency. He expects revenue will be up about two per cent compared with a year ago due to price increases at Shaw Cable and the Shaw Direct satellite TV services.

"But for us, cable TV, satellite TV and home phone are becoming increasingly irrelevant for younger consumers, making price increases in those segments more challenging," Ghose writes.

He added that Shaw's media arm also faces competition from Netflix and the possibility of regulatory changes next year that could allow for more channel-by-channel selections.

Wireless has been an area for growth for Canada's big telecommunications companies including Rogers Communications, BCE and Telus, who have also worked to maintain a tight grip on customers by offering deals if they bundle their services together.

Shaw had been expected to enter the wireless market after it participated in a 2008 wireless spectrum auction, which set aside a portion of the available licences for new entrants.

However, the company signed a deal last year to sell its wireless spectrum holdings as well as its Mountain Cablevision Ltd. in Hamilton, Ont., to Rogers (TSX:RCI.B).

In addition to its cable television and high-speed Internet business in Western Canada, Shaw also owns the Global Television network as well as a full slate of specialty channels including Food Network Canada, History Television and Showcase.

Ghose thinks Vancouver-based Telus (TSX:T) — which has been gaining TV and Internet subscribers at Shaw's expense — is a "buy." He also says Videotron, a Montreal-based cable, Internet, phone and wireless company owned by Quebecor (TSX:QBR.B), would be his second pick in the sector after Telus.

Other analysts are less pessimistic about Shaw's long-term outlook, but most expect that it continued to lose subscribers during the quarter ended May 31 and that the makeup of its business will be a long-term challenge to growth.

Macquarie Capital Markets analyst Greg MacDonald, who has a neutral rating for Shaw's stock, agrees that its media business faces above-average risk "due to the structural shift in viewership patterns from traditional TV to Internet."

MacDonald also writes that Shaw was likely able to add subscribers to its Internet services during the quarter "but we do not yet have faith that price increases in cable won't result in subscriber churn in that segment."

RBC Capital Markets analyst Drew McReynolds has also given Shaw a neutral "sector perform" and writes that "we believe Shaw continues to execute in a tough but rational competitive environment."

He expects there was a smaller decline in basic cable subscribers in the latest reporting period and that Shaw's profit margin was stable due to its efficiency initiatives and lack of irrational pricing in the residential markets that it serves.

McReynolds also writes that Shaw is "laying the foundation" to deliver annual revenue and earnings growth in the single digits, but, given the price of Shaw's stock relative to estimated earnings, "we would remain patient for more attractive and/or timely entry points."

Shaw's class B shares were down a penny at $26.39 in trading Tuesday. They hit a 52-week high of $27.50 on June 4.

Canaccord's 12-month price target for the stock is $24, RBC's is $25, and Macquarie's is $27.

According to data compiled by Thomson Reuters, analysts on average are estimating Shaw had 40 cents per share of adjusted earnings in the third quarter ended May 31, down from 52 cents per share a year earlier. Revenue is estimated at about $1.36 billion, up from $1.33 billion in the third quarter of fiscal 2013.

— Follow @DavidPaddon on Twitter.

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