Four Cheap Canadian Telecom Stocks

After a Dreadful 2022, the Communication Services Sector Rebounds

2023 has so far told an entirely different story. Earlier this year, a surge in Meta (META) and Alphabet (GOOGL) shares gave a boost to the entire sector, lifting the daily cumulative returns of our Developed Markets Communication Services Index above our Developed Markets Index. This trend has continued throughout 2023, with our global collection of communication services stocks returning 30.41% over the past twelve months. Luckily for investors seeking buying opportunities, as the sector continues to recover from last year’s losses and outpace the broader market, our analysts still see room for further growth.

In his recent outlook for the sector, Morningstar’s director of communication services equity research Michael Hodel noted that while Meta (META) and Alphabet (GOOGL) may have taken the spotlight so far this year, plenty of opportunities remain in traditional telecom and media companies. Citing healthy competition among U.S. telecom carriers and the addition of high-end plans designed to boost revenue per customer, Hodel foresees growth for telecom stocks in the coming quarters.

Opportunities in Canadian Telecom Stocks

Matthew Dolgin, who also covers the communication services sector for Morningstar, expects similar growth for Canada’s top telecom carriers. Rogers (RCI.B), BCE (BCE), and Telus (T), Canada’s three largest telecom companies, each currently earn a Morningstar Rating of Five Stars, meaning that their share price is significantly below what we consider them to be worth. Dolgin views each of these firms as well-positioned, citing unique business strengths that he considers competitive advantages.

Indeed, each of these stocks earn Narrow Economic Moats, meaning that we expect them to fend off rivals for at least the next 10 years. They also currently hold either Standard or Exemplary Capital Allocation Ratings, which means they benefit from sound balance sheets, appropriate investments, and reliable shareholder distributions. Below, we’ve spotlighted four of Canada’s highest quality communication services stocks, which are all currently undervalued. For Canadian investors searching for opportunities in this fast-growing sector, now may be the right time to buy shares of these companies.

Quebecor Inc (QBR.B)

• Industry: Telecom Services
• Price/Fair Value: 0.73%
• Star Rating: ★★★★
  
  

“Our narrow moat for Quebecor is based on the efficient scale pertaining to its telecom business in Quebec. Quebecor, with its Videotron brand, is the leading provider of fixed-line telecommunications services in Quebec, and it has averaged double-digit returns on invested capital over the past decade, well in excess of the roughly 7% weighted average cost of capital we estimate for the firm. We project returns on invested capital to remain steady at around 11% over the next five years.

Relative to BCE, we expect Quebecor to maintain its share lead. In a province that is culturally different from the rest of Canada and uses French as its official language, Quebecor is the local provider, and it prides itself on its customer friendliness. The firm has highlighted its number one ranking as Quebec’s most respected telecom company for 12 years running in market research firm Leger’s annual survey. With its French-language programming and French-language over-the-top television app, we believe Quebecor is the firm that best caters to Quebecers, and its historical fixed-line results have proven it.”

-Equity Analyst Matthew Dolgin

Rogers Communications Inc (RCI.B)

• Industry: Telecom Services
• Price/Fair Value: 0.67%
• Star Rating: ★★★★★
  
  

“Rogers Communications has ramped up investment in its wireless network in recent years and completely alleviated our concern that its network had been falling behind peers. Rogers was the biggest spender in 2019’s 600-megahertz spectrum auction and 2021’s 3,500-megahertz spectrum auction, and we don’t think its 4G or 5G networks have any practical differences versus its two big rivals. Since 2022, Rogers has had the strongest wireless business in Canada, and we don’t expect it to lose ground. With Canada’s policy to keep immigration high and allow in other foreign workers and students, Rogers is well positioned to keep expanding its wireless subscriber base.

Rogers' narrow moat stems from efficient scale and cost advantages in its wireless and wireline businesses, which accounted for 60% and 26% of total sales in 2022, respectively. Rogers has averaged an 11% return on invested capital since 2012, and while we expect it to face additional wireless competition in coming years, we still project it to average 10%-11% ROICs through 2026, continuing to exceed the 7.5% weighted average cost of capital we estimate for the firm.”

-Equity Analyst Matthew Dolgin

BCE Inc (BCE)

• Industry: Telecom Services
• Price/Fair Value: 0.76%
• Star Rating: ★★★★★
  
  

“BCE is the biggest Canadian broadband provider, with over 4 million high-speed internet customers at the end of 2022 and a footprint that reaches 75% of the nation’s population. As a legacy phone provider, BCE historically had an inferior network and still has lower penetration rates than Rogers and Videotron, but BCE has been closing the gap since 2017, and where it has fibre, it can now offer broadband speeds comparable with or better than competitors. In addition to the new customer outperformance, we think fiber will allow BCE to meaningfully reduce operating costs as it increasingly moves customers off its legacy copper network.

BCE's narrow moat stems from efficient scale and cost advantages in both its wireline and wireless segments. Unlike national wireless provider peers Rogers and Telus, wireline composes most of BCE's revenue (50%) and a similar share of its profit (52% of total adjusted EBITDA). Although BCE has similar wireless scale, the difference with rivals stems from the firm's much larger wireline footprint. According to the company, its network passes three fourths of the population, with a footprint extending from Saskatchewan through the entire eastern portion of the country. BCE's adjusted returns on invested capital have averaged over 10% over the last 10 years, exceeding the 7.5% weighted average cost of capital we estimate for the firm. We expect those returns to stay between 9% and 11% for each of the next five years.”

-Equity Analyst Matthew Dolgin

TELUS Corp (T)

• Industry: Telecom Services
• Price/Fair Value: 0.67%
• Star Rating: ★★★★★
  
  

“Telus' narrow moat stems from efficient scale and cost advantages in its wireless business and efficient scale in wireline. Telus' adjusted returns on invested capital have been depressed over the past three years—averaging about 7% versus 10%-11% in the preceding decade—as the firm has participated in multiple big wireless spectrum auctions and accelerated its capital spending to rebuild its fixed network with fiber. However, we think 2023 is an inflection point that will mark the start of increasing ROICs each year over our five-year forecast. The firm largely completed its new fiber buildout in 2022, and we don’t expect spectrum auctions in the next couple of years to be nearly as big as those in 2019 and 2021.

We think Telus’ wireline unit is its best business and the one most likely to drive future returns. The firm has replaced most of its legacy copper network with fiber, significantly upgrading the quality. We think this strategy has set Telus up for a prolonged period of success. Telus has already taken significant market share from Shaw, its primary competitor in the western Canadian geographies where it competes. In addition to further success we expect in adding subscribers because of the better capability the fiber network offers, we believe the fiber network gives Telus more pricing power and is more efficient, leading to reduced costs.”

-Equity Analyst Matthew Dolgin