This Telecom Stock Is an Underdog That Could See Tremendous Growth

Shaw Communications Inc. (TSX:SJR.B)(NYSE:SJR) didn’t have a great quarter, but that shouldn’t deter investors.

| More on:

Telecom stocks are a risky venture these days with many consumers opting for online options such as Netflix, Inc. for their content, resulting in fewer people signing up for conventional cable subscriptions. This makes investing in telecom stocks such as BCE Inc. and Rogers Communications Inc. unappealing because of their limited growth opportunities.

In its most recent quarter, BCE’s top line grew by 5%, while Rogers saw its sales increase by just 2.5% from a year ago. Investors can’t expect significant returns from these types of companies over the long term. However, there is one exception to this; it still has a lot of opportunity to grow.

Shaw Communications Inc. (TSX:SJR.B)(NYSE:SJR) released its quarterly earnings last week, and although its sales were up only 2.7%, the company’s bottom line increased by more than 28%. The big reason behind the improvement in net income was due to other gains and losses, which brought Shaw’s bottom line down $107 million a year ago compared to the $4 million boost that it gave the financials this quarter.

Although Shaw saw little top-line growth, and its improved net income was a result of non-operating items, there is a reason why investors should be optimistic about the company’s long-term growth potential.

Shaw has recently expanded into the wireless segment after it acquired WIND Mobile, which has since been rebranded as Freedom Mobile. While the company has always been a big player in TV and internet, mobile and wireless is one area where it has been noticeably absent.

With only $175 million in revenue in its wireless segment, it represented less than 15% of the company’s total sales for the quarter. However, that was still a 27% increase over the $138 million the segment posted a year ago, and it is the bright spot on an otherwise underwhelming quarterly report.

By comparison, Shaw’s wireline segment, which makes up the remainder of its sales, was flat from the prior year with consumer-related sales down over 1%.

Developing the wireless segment will take time

Freedom Mobile presents significant opportunities for Shaw to grow, but it will take time. The carrier is still not a big player in the industry, as its coverage is still very limited to certain major cities. As Shaw invests in the brand and builds it into a more formidable opponent to those already in the industry, then we’ll likely see a lot of that opportunity start to be realized.

Competition is severely limited in the industry, and by adding another affordable choice for consumers, Shaw will be able to accelerate its growth, and that will be great news for the stock and its investors.

Should you buy Shaw today?

In the past year, the stock has been down more than 2%, and the recent results were not well received by investors. Shaw currently pay its shareholders a very strong dividend of over 4.3%, and with monthly distributions it is a great way to add recurring income to your portfolio.

Despite the stock’s lacklustre performance, investors shouldn’t ignore the upside that the share could achieve once Freedom Mobile starts accounting for some significant market share in the industry.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned. David Gardner owns shares of Netflix. Tom Gardner owns shares of Netflix. The Motley Fool owns shares of Netflix.

More on Investing