Three Canadian Telecom Stocks Trading at Deep Discounts

Nevertheless, the rout has created a significant price-to-fair-value gap for some of these stocks, presenting an opportunity for investors seeking undervalued assets with strong potential for long-term gains. “The market has become overly pessimistic about some of the headwinds,” says Morningstar equity analyst Matthew Dolgin.

Here are three Canadian telecom stocks that Morningstar analysts believe are trading at attractive prices for long-term investors:

• Rogers Communications RCI.B
• BCE BCE
• Telus T

Here’s a closer look at Morningstar’s take on these stocks.

Rogers Communications

• Fair Value Estimate: C$78.00
• Price/Fair Value: 0.65
• Economic Moat: Narrow
• Capital Allocation Rating: Standard
• Morningstar Rating: 5 stars

Canada’s largest telecom operator, with more than 11 million subscribers, Rogers provides wireless, landline, and internet services nationwide. The crown jewel of its business, the wireless segment, accounts for more than half of total revenue. Rogers shares have fallen about 20% in the year to date, underperforming the broader Canada Index’s growth of over 16% as of Nov. 14.

While the stock has been out of favor, the company’s performance this year has held up quite well, according to Dolgin. “We’ve liked the opportunity for Rogers the most, as we’ve seen [the potential] for margin expansion and its wireless subscriber growth has led the industry,” he says.

In its cable business, Rogers faces intense competition from rival BCE building out a superior fiber optic network, which continues to garner market share. “We don’t forecast much sales growth for Rogers’ cable (wireline) business, so that’s more likely to surprise to the upside rather than down,” says analyst Matthew Dolgin. Rogers is part of a three-player oligopoly, including BCE and Telus, which controls over 90% of the domestic market. However, the growing expansion of a fourth operator, Quebecor, could have implications for the incumbents.

“With Quebecor entering the market as a national wireless competitor, and four participants offering excellent networks, we expect competition to weigh on pricing power throughout the industry, which should temper wireless services revenue growth,” warns Dolgin. Still, he assures that Rogers has the strongest wireless business in Canada, “and we don’t expect it to lose ground.”

BCE

• Fair Value Estimate: C$56.00
• Price/Fair Value: 0.68
• Economic Moat: Narrow
• Capital Allocation Rating: Exemplary
• Morningstar Rating: 5 stars

Telecom giant BCE provides wireless, broadband, television, and landline phone services across Canada. It is one of the big three national wireless carriers, with over 10 million customers, constituting about 30% of the market. The company also operates a fixed wirelines telephone business and owns a media segment comprising television, radio, and digital media assets.

“BCE has faced the most pressure and is under the most regulatory pressure right now,” Dolgin says. He points out that the telecom recently made a C$5 billion acquisition of regional broadband provider Ziply Fiber, which has made BCE stock “a little riskier.”

BCE recently announced a large third-quarter loss of C$1.24 billion, attributing it to increased competition in wireless and a C$2.1 billion writedown of its media properties. This forced management to lower its 2024 revenue forecast to a loss of 1.5%. from the earlier expectation of zero to 4% growth.

Dolgin, who recently lowered the stock’s fair value estimate to C$56 per share (still at a 32% discount), attributes this underperformance to “stiff competition in the wireless market,” because of which, “the firm lowered full-year revenue guidance.” He argues, though, that the market has overreacted, and that “the wireless market will rebound, paving the way for pricing and subscriber growth improvements.”

BCE has also invested heavily in its fiber optics business over the past several years, which underpins its competitive advantage. “The strategy to invest in fiber was wise and will drive future outperformance,” Dolgin says.

Telus

• Fair Value Estimate: C$33.00
• Price/Fair Value: 0.66
• Economic Moat: Narrow
• Capital Allocation Rating: Exemplary
• Morningstar Rating: 5 stars

The third-biggest telecom operator in Canada, Telus boasts over 10 million mobile phone subscribers nationwide, about 30% of the total market. The career enjoys a dominant position in western Canada, particularly in British Columbia and Alberta, where it provides internet, television, and landline phone services. As a result of recent acquisitions, the company now derives 20% of its sales from non-telecom ventures, primarily in the international business services, health, security, and agriculture industries.

Telus recently reported a strong third quarter, with its profit and revenue topping estimates. “Telus was able to find the right balance between customer acquisition and promotions in the core telecom business—a challenging feat given the stringent competitive landscape,” says Morningstar equity analyst Samuel Siampaus. The operator has taken significant market share from Shaw (now owned by Rogers), its key rival in western Canada.

“In addition to the 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,” says Dolgin.

Unlike its peers, Telus has ventured into markets beyond the telecom sector. The company has made substantial investments in businesses that can benefit from its strong presence in the telecom market. However, these investments don’t come without their own risks. “These peripheral businesses—namely in the health, security, and agriculture industries—are typically small and fast-growing, but not necessarily profitable,” Dolgin explains. While these ventures have a high potential upside, they could also become a drag on returns on invested capital.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.