Shaw Communications Inc. (SJR) declared financial results of its third quarter of fiscal 2010. Quarterly net income was $155.1 million or 36 cents per share, compared to a net income of $130 million or 30 cents per share in the prior-year quarter. The third quarter EPS of 36 cents beat the Zacks Consensus Estimate of 34 cents. The increase in EPS was primarily due to higher service operating income.

Quarterly total revenue of $943.6 million was up 9.5% year-over-year. The year-over-year improvement was primarily due to customer growth from new acquisitions and rate increases. However, third quarter total revenue of $943.6 million was below the Zacks Consensus Estimate of $960 million.

Quarterly operating income before amortization was $435.8 million, up 10.2% year-over-year. However, excluding one-time CRTC Part II fee recovery, operating income before amortization increased 10%. In the reported quarter, Shaw Communications generated $328.5 million of cash from operations compared to $328.1 million in the year-ago quarter. Free cash flow (cash flow from operations less capital expenditures) in the same quarter was $177.8 million compared to $164.1 million in the year-ago quarter.

At the end of the third quarter of 2010, Shaw Communications’ cash & marketables were even with the $453.2 million at the end of fiscal 2009. At the end of the third quarter of 2010, Shaw Communications had $3,986.4 million in outstanding debt on its balance sheet compared to $3,150.5 million at the end of fiscal 2009. The debt-to-capitalization ratio at the end of the same quarter was 0.59 compared to 0.52 at the end of fiscal 2009.

Subscriber Statistics

At the end of the third quarter of fiscal 2010, the Basic Cable customer base was 2,330,879, a net year-over-year addition of 2,322. The Digital customer base was 1,595,619, a net year-over-year addition of 87,092. The Internet customer base was 1,796,973, a net year-over-year addition of 25,661. Digital phone lines were 1,044,410, a net year-over-year addition of 66,123. DTH customer base was 904,965, a net year-over-year addition of 1,856.

Cable Segment

Quarterly revenue was $745.2 million, up 11.3% year-over-year. Quarterly operating income before amortization was $363.9 million, up 11.8% year-over-year. Subscriber growth through new acquisitions and rate increases are the primary reasons for this impressive result.

Satellite Segment

Quarterly total revenue of $198.4 million was up 3.5% year-over-year. Within this segment, DTH revenue was $178.7 million, 5.1% year-over-year and Satellite Service revenue was $19.7 million, down 9.2% year-over-year. Quarterly operating income before amortization for the whole segment was $72 million, up 3% year-over-year.

Future Outlook

Management predicted that full fiscal 2010 operating income before amortization may increase by more than 14% year-over-year. Free cash flow will remains same to that of fiscal 2009. Management also declared that the company will try to enter into the Canadian wireless services market in 2010.

Our Recommendation

We maintain our Neutral recommendation for Shaw Communications. We believe the company’s recent initiative for a super-fast FTTH network and entry into wireless market will sustain its long-run growth.

However, the short-term Zacks Rank for this stock is #4 (Sell). Shaw Communications is facing increased competitive pressure in its core cable TV market due to gradual entry of Telus Corp. (TU) and BCE Inc. (BCE). Newly entered players may shave Shaw’s market share and cap margin expansion in the near-term.
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