Can These Hot Streaming Video Picks Fuel Your 2013 Portfolio?

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On our smartphones, tablets and PCs, streaming content is now all around us. Telecoms are jumping into streaming content as a way to enhance their growth prospects. Some of these companies hope to benefit from higher data plan revenue and lower smartphone prices. The question for investors is which, if any, of these telecom stocks is attractively priced relative to other firms that are involved in streaming content. In this article, I will discuss AT&T (NYSE: T), Verizon (NYSE: VZ), Coinstar (NASDAQ: OUTR), and BT Group (NYSE: BT) to see which look promising as investment opportunities in this hot, quickly growing space. 

AT&T posts record smartphone sales

AT&T set a record when it sold over 10 million smartphones in the fourth quarter, with demand for iPhone and Android devices boosting holiday sales. The second-largest U.S. wireless carrier reported that the last quarter’s results eclipsed the fourth quarter 2011 record high sales of 9.4 million.

During the third quarter, AT&T added 151,000 subscribers, or just a tenth of the 1.5 million net subscriber additions its biggest rival, Verizon, booked for the same period. The Dallas-based company is catching up with Verizon in rolling out a Long-Term Evolution, or LTE, network, a new technology allowing for faster data downloads.

AT&T Mobility division President, Ralph de la Vega, said the company’s strategy is to gain more smartphone customers, because they use more data, thus generate more revenue, than regular phone subscribers. They generate twice as much average revenue per user, or ARPU, compared to other customers.

Verizon and smartphones

Verizon Wireless, Verizon's mobile phone branch, added 2.1 million monthly contract users during the fourth quarter of 2012. Nearly 90% of them signed up for smartphones such as the iPhone. 6 million iPhones flew off shelves during the last quarter, almost double the number sold during the third quarter of 2012. Besides the iPhone, Verizon has been widening its offerings with other popular high-end smartphones running Google's Android or Microsoft Windows Phone 8, with recently re-named Blackberry's Blackberry 10 coming soon.

The advantage of offering smartphones is that these devices also make it easier to surf the Web, stream music, and watch video, activities that require a higher data usage than with regular mobile phones. Obviously, this also translates into higher monthly bills and more profits for Verizon. Such a growth of data usage contributed to a rise of nearly 7% in Verizon's average monthly bill for contract users. The carrier is attracting new smartphone users through publicity of its LTE network, a technology in which Verizon has a one-year lead over its biggest rival, AT&T. Another strategy being used is targeting heavy data users with its Share Everything Plan, which lets customers share a common data plan between up to 10 devices.

Analyst Avi Greengart of Current Analysis said, “It’s a big upfront cost on smartphones and a short-term hit. They have to offer enormously expensive phones at affordable prices to move customers onto higher-priced plans.”  However, this is starting to show its profit potential even in the short term, as such an increase in wireless revenue helped offset the loss from slower sales to business and landline customers.

Verizon had previously issued a warning that the phone's subsidies would cut into its profit. The company is focusing on getting more subscribers in hopes that they will become more profitable as smartphone models become cheaper from intensifying price competition. As Chief Financial Officer Fran Shammo said, "We made a concerted effort to go after more business in wireless. As a result, we posted historical net subscriber additions.”

Once the market has a wider range of smartphones available and manufacturers have to compete harder for maintaining or increasing their market share, they will be forced to cut prices, meaning Verizon's subsidy costs should also go down. Verizon CFO Fran Shammo also stated, "It’s the same thing we saw with basic phones: The more competition there is, the more prices come down."

Verizon Communications, the second largest U.S. phone company, missed its profit estimates after a record number of new wireless subscribers brought along a higher number of smartphone subsidies. Although analysts had estimated earnings of an average of 50 cents per share during the fourth-quarter of 2012, the actual profit was 45 cents a share. Also, Verizon's sales during the fourth quarter rose nearly 6% to $30 billion, a number much in line with the $29.8 billion forecasted by analysts, yet its net loss was  more than $4 billion. This was largely caused by a pretax charge of more than $7 billion to cover benefit expenses and severance, as well as an adjustment in the value of pension liabilities.

Telecoms and Video

Verizon Communications and Coinstar are launching Redbox Instant, a venture that offers online streaming movies to Redbox DVD customers. 

Coinstar saw its biggest fall in over six months after the owner of Redbox DVD kiosks commented that a lackluster film lineup will cause results to miss analysts’ estimates this quarter. Coinstar dropped 7% on February 7 after the company released its fourth-quarter earnings and its first-quarter forecast. According to the company's Chief Financial Officer Scott Di Valerio, "Fewer new releases on DVD will diminish sales and profit this period." He also noted that the company "needs to bring back customers who stopped renting during the third quarter, when content also was weak."

Across the pond, BT Group rolled out a 2.5 billion-pound ($3.95 billion) fiber-optic project for faster Web access and expanded its TV offers to counter declining sales in traditional phone services. The London-based former phone monopoly lured 60,000 subscribers for YouView, its video-on-demand service which started in October. YouView allows TV viewers to catch up on the latest episodes of their favorite shows from the British Broadcasting, ITV (ITV), Channels 4 and 5, before the next episode airs.

This summer, BT Group is set to release its new sports channel, featuring rugby matches and Premier League soccer.  BT Group Chief Executive Officer Ian Livingston said, “Our fiber plans are helping to make the U.K. a broadband leader in Europe.  This gives us an excellent platform for our push into TV and sport later this year.”

BT Group results

BT Group’s adjusted EBITDA inched up 1.6% to 1.55 billion pounds ($2.5 billion) for the third quarter ended Dec. 31, beating analysts’ average estimate of 1.53 billion pounds ($2.416 billion’) although revenue, excluding the effect of a regulatory decision, decreased 6% to 4.51 billion pounds ($7.124 billion), and matched the analysts’ average estimate.  BT Group expects revenue will improve in the second semester as compared with the fiscal first half.

The regulatory decision pertains to a dispute over Ethernet pricing, and is expected to cut revenue from 100 million pounds ($158 million) to 200 million pounds ($316 million) for two years, ending in March 2013 and 2014 respectively.

Valuation

We can look at the valuations of telecoms and players in the streaming video space and see how Verizon and BT Group fit in:

Ticker

Company

P/E

P/S

EPS Growth Next 5 Years

BCE

BCE

13.09

1.72

1.8%

BT

BT Group

10.32

1.17

3.9%

CTL

CenturyLink

39.77

1.41

1.5%

T

AT&T

29.42

1.56

5.9%

VZ

Verizon

143.35

1.1

7.4%

CSTR

Coinstar

11.02

0.7

17.6%

NFLX

Netflix

613.62

2.76

18.8%

AMZN

Amazon.com

NA

1.92

41.6%

Data from FinViz.com. Streaming video stocks are listed at the bottom in italics

Analysts see more growth in streaming video than they do for telecom companies. BT Group and Coinstar appear the cheapest on a price-to-earnings basis in either industry. These two companies are also are cheap on a price-to-sales basis. Verizon and AT&T have analyst growth estimates that do not justify their price multiples, and Netflix is pricey even in view of its high anticipated growth.

Conclusion

Investors should consider BT Group and Coinstar as ways to play streaming video. BT Group in particular is an interesting combination of content provider and Telecom Company. 


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