Here's Why You Should Sell Shaw Communications (SJR) Now

On Dec 27, Shaw Communications Inc (NYSE:SJR) was downgraded to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s have a look at the catalysts that led to the stock’s degradation.

What's Troubling the Stock?

Shaw Communications operates in a highly competitive Canadian wireless market with incumbents like Rogers Communications Inc (NYSE:RCI) , TELUS Corp (NYSE:TU) and BCE Inc (TO:BCE) . Stiff competition has resulted in video, Internet and landline phone businesses loss.

Rolling out of new brands, advertising promotions to lure subscribers and technological advancements are likely to escalate expenses. The combined costs will adversely impact margins in the upcoming period.

Moreover, the company’s cash and liquidity position are a major concern. In the fourth quarter of fiscal 2017, Shaw Communications generated $185.6-million cash from continued operations, down 19.7% year over year. Free cash flow was at $1.6 million, reflecting a substantial decline of 77.8% year over year. The downside was caused by higher planned capital expenditures and the loss of free cash flow in the prior-year quarter by the former Media division, sold on Apr 1, 2016. This was partially offset by lower cash taxes and higher dividends from equity accounted associates. At the end of fiscal 2017, Shaw Communications had cash and total outstanding debt of $405.6 million and $3,440 compared with $545.5 million and $7,186.3 million, respectively, at the end of Aug 2016. In fiscal 2017 end, the debt-to-capitalization ratio was 0.41 compared with 0.48 at the end of fiscal 2016. The accumulating debt and declining cash flows may act as headwinds for the company's long-term growth and is likely to escalate expenses.

Plagued by such headwinds, the company’s shares have lost 1.2% compared with the industry’s decline of 0.8%, over the past three months.

Some Positives to Note

However, Shaw Communications’ recent strategic business initiatives look impressive. These include the sale of data center operations — ViaWest — to Peak 10 Holding Corp and the utilization of the net proceeds from the sale for the purchase of wireless spectrums from Quebecor Media. The company’s rating outlook upgrade by Moody’s Investor Services was a major positive. The company has positioned itself as a pure-play Canadian telecom company with the divesture of its unit — Shaw Media — to Corus Entertainment. The company’s venture into the Canadian wireless market with the acquisition of a 100% interest in Mid-Bowline Group Corp (the parent company of WIND Mobile Corp) should pay off.

It is to be seen whether the company can maintain last quarter's massive user gain in the upcoming quarterly results. In fourth-quarter 2017, video cable customer base in the Consumer segment totaled 1,671,277, reflecting a net addition of 7,567 subscribers. In the Wireless Segment, postpaid customer base totaled 764,091 reflecting a net addition of 29,089 customers in the reported quarter. The prepaid section gained 11,925 customers taking the total to 383,082 customers.

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