Key Takeaways for Rogers Stock:
- Investors have sold off Canadian telecom stocks over the past month following a questioning of Telco CEOs at the House of Commons. But we think the stocks have been oversold.
- Members of Parliament targeted layoffs and price increases at the telcos in their questions. It was politically popular, but we do not expect significant changes to come from it, especially since Canadian wireless prices have already fallen greatly.
- We now think legislators will be careful not to upset the recently improved consumer environment, especially on improved wireless data connectivity. With a leading business in the Canadian wireless sector, we see Rogers stock as significantly undervalued.
Andrew Willis: So big Telco CEOs are grilled at the House of Commons and their stocks sell off in the following month. Why the selloff? Do investors still expect a regulatory reckoning for our communications sector?
We were concerned about the impact on uncertainty from worsening regulatory relations on the likes of BCE stock, but at the March 18 meeting Members of Parliament homed in on employee layoffs and price increases - which could be a problem for the bear case here.
Senior equity analyst Matthew Dolgin notes that while it’s a popular move to vilify telecoms, on the price increases, these businesses have not been enjoying financial windfalls and telecom consumer prices have been stagnant to deflationary in recent years.
Apart from prices, in terms of performance, consumers also have it better than ever with the progress made in rolling out 5G networks that can accommodate the huge growth in data usage. We expect regulators and legislators to keep this in mind and not want to upset the situation. And guess who has the strongest business in the wireless arena to benefit from this delicate political balance?
Rogers Communications Leads Canadian Wireless
After falling behind its two rivals, BCE (BCE) and Telus (T), Rogers (RCI.B) now has the best wireless business in Canada and we don’t expect it to lose ground. Wireless now makes up 52% of Rogers' sales as of 2023, and with those revenues nearing 20 billion - up around 25% on a year-over-year basis – you can see the scale and opportunities for cost advantages.
Now combine the growth of wireless at Rogers with ongoing billion-dollar cost synergies from the Shaw merger, and of course, ongoing subscriber growth - and you’ll get the bull case for Rogers stock.
For Morningstar, I’m Andrew Willis.
Rogers Bulls Say
- With the Canadian wireless market less penetrated than the US 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 still has significant margin expansion opportunity ahead as it continues realizing efficiencies with Shaw.
- The company's 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.
Rogers Bears Say
- A heavy-handed regulatory environment and competition will prevent Rogers from raising prices substantially, thus damping hopes for material revenue growth.
- New fiber networks from BCE and Telus makes these phone companies much stronger broadband competitors than they were historically. Along with the secular decline in television and landline phone customers, the firm’s cable customer base may keep shrinking.
- Quebecor is the strongest fourth national competitor yet, which should pressure wireless pricing and bring a new entrant to share more of the growing pie.
The author or authors do not own shares in any securities mentioned in this article.
