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Andrew Willis: Over the last few years, the cost of cell service in Canada has come down nearly 30%, according to a recent CRTC report. Telus (T), however, managed to pull off revenue growth per wireless phone customer.
Perhaps it’s the performance of its wireless network, which benefits from Bell (BCE)’s network through a sharing agreement – that keeps customers paying for a premium connection. But investors should focus on the best business at Telus, which remains home internet and television, according to equity analyst Matthew Dolgin, saying that future returns are most likely to be driven by the wireline business.
As great as the cell service at Telus may be, we see fierce competition ahead with low-cost carrier Freedom Mobile now being backed by Quebecor. But when it comes to wireline, Telus already replaced its copper lines with fibre - and renewed its pricing power.
For Morningstar, I’m Andrew Willis.
Bulls Say
- With the buildout of FTTH, Telus' wireline network quality has eclipsed that of primary competitor Shaw over much of its footprint. This should propel continued strength in wireline pricing, margins, and share gains.
- The Canadian government’s goal of significantly increasing immigration should prompt high levels of subscriber growth for all wireless incumbents, and Telus is second to none.
- Telus’ free cash generation should rise significantly and stay elevated as it has now passed the bulk of the capital spending associated with its fiber network overhaul.
Bears Say
- A combined Quebecor and Freedom Mobile should make for Canada’s strongest-ever fourth national wireless competitor, and it will undercut the Big Three on price, limiting pricing power and pressuring margins.
- Regulators' preference for competition and presence in the industry will keep a lid on incumbents' profits and business potential.
- Telus' aggressive pursuit of nascent, noncore businesses for high valuations bring higher risks than typically associated with telecom stability, albeit with more potential upside.
