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O, Canada!
U.S. media stocks have been hosers but investors should stand on guard for True North media firms.
December 7, 2005: 2:20 PM EST
By Paul R. La Monica, CNNMoney.com senior writer
The Great White North: Investors have embraced shares of Canadian telecom and cable giant Rogers. But U.S. cable titan Comcast and telecom colossus Verizon have slumped.
The Great White North: Investors have embraced shares of Canadian telecom and cable giant Rogers. But U.S. cable titan Comcast and telecom colossus Verizon have slumped.
The Spirit of Radio: Shares of Canadian radio operator Corus Entertainment have vastly outperformed top U.S. radio firm Clear Channel and satellite industry leader XM.
The Spirit of Radio: Shares of Canadian radio operator Corus Entertainment have vastly outperformed top U.S. radio firm Clear Channel and satellite industry leader XM.
INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER upgrades & downgrades earnings & warnings public offerings INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER

NEW YORK (CNNMoney.com) Big time media stocks are having a rough year, languishing over concerns of brutal competition and sluggish advertising growth.

But that's the case for shares in U.S.-based media companies. Those based in our friendly neighbo(u)r to the north are doing just fine.

Shares of Canadian cable firm Shaw Communications (Research) are up 16 percent while cable and wireless company Rogers Communications (Research) has surged 46 percent. Corus Entertainment (Research), a radio company based in Calgary, is up nearly 25 percent.

And Canadian telecoms, which like their U.S. counterparts are increasingly becoming more and more like cable and media firms, have also held up well when compared to the Yank telecoms.

Shares of Canada's largest telecom, BCE (Research), which also owns a stake in newspaper the Globe & Mail and television broadcaster CTV, are up slightly this year. Stock in Vancouver-based Telus (Research) has surged 30 percent.

What's this all aboot? Why are Canadian media stocks performing so well while those below the 49th parallel struggle?

Competition isn't as fierce

In a nutshell, the Canadian telecom and media landscape is a lot less competitive. Since there are fewer players chasing a much smaller market, that enables the big media and telecom firms to avoid as many nasty profit-hurting price wars.

"Wireless is a three player oligopoly and companies are behaving rationally," said John Henderson, an analyst with Toronto-based Scotia Capital, referring to BCE, Telus and Rogers.

Henderson adds that Telus and Rogers have outperformed BCE because they more exposure to the wireless business.

Another analyst, Kona Shio of Conscius Capital Partners, a research firm based in Montreal, thinks Rogers and Telus should have a good year in 2006 as well. In addition to their strong growth in wireless, he said that Rogers should be able to trim its debt load next year and that Telus could increase its dividend.

But Rogers, in particular, may be the best positioned Canadian stock since it is a true telecom-cable hybrid, a status that most U.S. cable and telecom companies are still trying to attain.

While several big U.S. cable companies plan on launching wireless services next year through a partnership with Sprint Nextel, Rogers already offers the so-called "quadruple play" of video, voice, data and wireless services.

"Rogers is unique in North America in that it is an integrated wireless and cable play. It is in the market with a true four product bundle," said Tim Casey, an analyst with BMO Nesbitt Burns in Toronto.

For this reason, Casey said that Rogers is one of his top picks in the Canadian media sector. But he also likes radio operator Corus as well.

Someone still loves radio, eh

Analysts expect Corus, which owns and operates about 50 radio stations throughout Canada, to report a revenue increase of about 6 percent in fiscal 2006. That's impressive when compared to expected sales growth rates of between 2 percent and 4 percent for big U.S. radio firms Clear Channel Communications (Research), Citadel Broadcasting (Research) and Cumulus Media (Research).

Shio said that a big reason why the Canadian radio market is more attractive than the U.S. one is because satellite radio is still relatively new to Canada. So companies like Corus haven't had to fight as hard to keep listeners.

"From a competitive standpoint, the Canadian radio industry is much more benign and that's why Corus has really outperformed," he said.

Shio also said there is a heavier emphasis on local radio content in Canada since the country's population is more spread out, not to mention the fact that there are some big cultural differences (i.e. a large French-speaking populace in Quebec) that makes it harder (and more expensive) for a large national radio network to attract listeners.

"I don't think the satellite companies will want to spend that much on local content so it might not be as big a success as it in the U.S.," he said.

Casey added that it will probably be tougher for XM Satellite (Research) and Sirius Satellite (Research) to do as well in Canada as they have been in the U.S. because of their late start in the market. So that bodes well for Corus.

Still, not all of the big Canadian media companies look like good bets. Henderson said Shaw's stock has performed well this year but that this has more to do with the fact that the Shaw family, the company's controlling shareholders, have been buying back stock.

Shaw's fundamentals are not nearly as strong as its rival Rogers. Analysts expect sales for Shaw to increase by about 9 percent in fiscal 2006 while analysts are projecting nearly 35 percent top-line growth for Rogers.

In fact, Warren Buffett, perhaps the world's most famous investor, has recently trimmed his position in Shaw. Buffett's Berkshire Hathaway investment company disclosed last month that it sold a big chunk of its Shaw holdings in the third quarter, reducing its stake from 22 million shares to 7.1 million shares.

For more about competition in cable, click here.

For a look at foreign stocks trading in the U.S., click here.

None of the analysts quoted own stocks of the firms discussed in this piece but BMO Nesbitt Burns and Scotia Capital are seeking investment banking business with the companies mentioned in this piece.  Top of page

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