Interested in more cheap stocks? Check out our recent episode about Telus.
Ruth Saldanha: Rogers Communications (RCI.B) dominated the headlines for most of last year, mainly because of its merger with rival Shaw Communications. Since the merger closed earlier this year, the Rogers stock has been struggling, down nearly 6.9% year to date as of June 20th. However, we think that the stock price does not truly reflect Rogers’ potential.
Rogers has ramped up investment in its wireless network in recent years and completely alleviated Morningstar analyst Matthew Dolgin’s concern that its network had been falling behind peers. Since 2022, Rogers has had the strongest wireless business in Canada, and Dolgin doesn’t expect it to lose ground – in fact, Rogers is well positioned to keep growing its wireless subscriber base.
The one thing investors should keep an eye on, though, is the ever-present threat of increased government intervention. In fact this threat is why Dolgin hasn’t assigned Rogers a Wide Moat. In the wireless space, the government seemingly favors more robust competition for the top three providers, as evidenced by it historically giving other competitors favored status in spectrum auctions.
We believe the Canadian government views telecom services as public goods to some extent, and we think it will continue looking out for public interests, often to the detriment of top providers. With that in mind, we cannot assume that the current environment will persist over a 20-year period, and our level of confidence in long-term projections is tempered by the industry's sensitivity to government influence.
The Narrow-moat telecom major has a fair value estimate of $75, and it currently trading significantly below this level.
Bulls Say
- With the Canadian wireless market less penetrated than the U.S. and Europe and the country receptive to immigrants and foreign workers, wireless subscriber growth should remain high. As the industry leader, Rogers is well positioned.
- Rogers' media unit is worth far more than the market is giving it credit for. If that continues, Rogers can sell some assets to create significant value.
- A gradual return of roaming traffic gives a long runway for heightened wireless average revenue per customer growth.
Bears Say
- A heavy-handed regulatory environment and competition will prevent Rogers from raising prices substantially, thus damping hopes for material revenue growth.
- With BCE's fiber-to-the-home buildout, its network will finally be a worthy competitor to Rogers', which could allow BCE to poach some customers and reduce Rogers' pricing power.
- Rogers agreed to pay a big premium for Shaw and is counting on significant synergies. The integration risk may be higher than any potential benefit Rogers gets from acquiring Shaw.
