Shaw Cable bill escalating

Shaw Cable services most of Western Canada and they have been steadily escalating their prices each year. I only use them for cable internet services and subscribe to the high speed service.

The bill has had the following escalation curve, with sales taxes included (12%):

January 2008: $45.87
May 2009: $46.99 (+2.4% from previous)
September 2009: $49.23 (+4.8% from 4 months ago)
September 2010: $52.64 (+6.9% from 12 months ago)

Total since January 2008: +14.8%

While I have had few issues with my service, I do not believe that these price increases are “inflationary” in nature, and rather reflect economic elasticity – customers are likely not to go through the hassle of canceling and getting the alternative service (TELUS’ ADSL) to save a few dollars.

The standard corporate line is likely “We have to do this to make improvements to our network”, but the service itself has not changed since getting it – anecdotally, it feels slower, but this could just be because there is more garbage that gets sent through the internet these days.

The price increases are getting to the point where I am examining options. TELUS’ high speed internet service (without bundling) is $37/mo pre-tax, compared to Shaw’s new price of $47/mo pre-tax. Is one service better than the other? Is switching a seamless process (i.e. will I have loss of service)? It is these types of questions/risks that make me wonder whether it is worth $134/year to make a switch decision.

It is clear that the companies are only competing against each other for marginal customers, and will not engage in price competition for their existing customers.

In terms of publicly traded stocks, while it is clear that Shaw (TSX: SJR) and TELUS (TSX: T) will not double their equity valuations overnight, they do represent a store of value assuming that no other companies will be able to disrupt the wireline broadband marketplace. The same holds true for equivalent companies on the eastern side of the country (to name some: Bell, Videotron, Rogers). TELUS also has diversification in their wireless marketplace, but this is being chipped away by the deep-pocketed Orascom subsidiary, Wind Mobile.

Fairfax Fixed Income offering

Via James Hymas, Fairfax Financial is issuing $250M in preferred shares, with a 5% yield, and 2.85% above 5-year government bond rates thereafter, and the (holder’s) option to convert to preferreds yielding a floating rate of 2.85% above 3-month government treasury bill rates every five years.

5-year government rates were 2.16% on September 24, and the 3-month note rates were at 0.90%.

Cheap, cheap financing. As issuers start to pound away on the fixed income side (due to heavy demand), it makes you wonder when the party will end. My strong impression is that companies should be extending maturities and securing their debt financing since rates right now are about as good as they will get due to such voracious demand for fixed income securities.

Manulife valuation

I have spent many hours, spread over about a week, understanding and performing a valuation on Manulife Financial (TSX: MFC).

Readers that track TSX 60 stocks should know that Manulife (and its chief peers, Sun-Life, and to a lesser degree Great West) has gotten hammered over the past year (-40%) and two year (-65%) interval.

Lower equity valuation is not a sign that the stock is worth purchasing – it could perhaps reflect the fact that the equity was over-valued in the first place. Or maybe it is a signal to purchase.

Unfortunately, I have done enough work on the matter that I won’t be giving too much away (i.e. what my “price range” would be for the equity), but I would suggest to people that get into a similar endeavor to realize that Manulife is not solely in the insurance business.

The other point that people should be aware of is that accounting treatment is crucial in properly understanding the line items listed on the consolidated and segment data. This may make comparisons to US-based businesses not an apples-to-apples procedure.

Finally, investors should realize what implicit “macroeconomic” assumptions they are making before investing in the equity. It is similar to making an implicit bet on the price of oil when you purchase shares in Suncor – obviously you won’t be investing in oil companies if you believe the price of oil is going down.

Possibility of a rate increase before year’s end?

I notice that the Banker’s Acceptances have dropped (implying future rate increases) over the past week. Current quotations are as follows:

Month / Strike Bid Price Ask Price Settl. Price Net Change Vol.
+ 10 OC 0.000 0.000 98.640 0.000 0
+ 10 NO 0.000 0.000 98.630 0.000 0
+ 10 DE 98.615 98.620 98.650 -0.030 12401
+ 11 MR 98.450 98.460 98.520 -0.060 21511
+ 11 JN 98.380 98.390 98.450 -0.070 6701
+ 11 SE 98.310 98.320 98.380 -0.060 2617
+ 11 DE 98.250 98.260 98.310 -0.050 1526
+ 12 MR 98.190 98.220 98.240 -0.040 99
+ 12 JN 98.090 98.130 98.150 -0.030 7

Look at the December contract – implied pricing of 1.39%. On September 8th, this was 1.14%.

Three-month corporate paper is currently trading at 1.14%, which implies that we could be seeing one more rate hike (of 0.25%) before year’s end. The next Bank of Canada scheduled rate announcements are October 19 and December 7.

Canada Fiscal Monitor – July 2010

The Ministry of Finance in Canada has released the July 2010 fiscal update.

The noticeable highlights for the four months ending July 31, 2010 vs. July 31, 2009 include:

– Bottom-line deficit down to $7.7 billion ($23.1 annualized) vs. $18.3 billion ($54.9 annualized)
– Corporate income tax collection up 1.7%, despite a 5.3% drop in the rate (from 19% to 18% effective January 1, 2010).
– GST collections up 34% (indicating a significant increase in consumer spending);
– EI benefit payments down 7% (implying expiry of previous benefits and/or people finding employment)

As the government’s stimulus package is due to end on March 31, 2011, it remains quite conceivable that they will be able to balance the budget in a couple years. This bodes well for Canada because a zero deficit number will signal to the marketplace that tax increases are not imminent.

The other factor I will keep mentioning is that the corporate tax rate is due to decline from 18% to 15% by January 1, 2012. If the government does not fall between now and then, the big winners of this will be investors in profitable Canadian firms.