By Jamie Sturgeon | Financial Post - Stockhouse.com | Oct. 23, 2010Make no mistake, there are seismic changes percolating just below the surface of the telecommunications industry.
New wireless competition, major acquisitions that hold the potential to sharply tilt the balance of power as well as new regulatory concerns threaten to drag on earnings for Rogers Communication Inc., BCE Inc. and Telus Corp.
Year to date, none have — while investors have poured funds into the three blue chip stocks in search of stability and yield. The S&P/TSX Telecom index is up 25% since Jan. 1, led by Telus’s 41% rise. Rogers is trading 25% higher and Bell up almost 22%.
The trio have been quintessential market darlings in 2010, a year that was supposed to be defined by instability for the big telecoms. New mobile startups were suppose to be winning over anxious customers in droves. In part as a result, incumbents were suppose to be at each others’ throats (even more-so) to guard not just wireless, but home-phone, broadband and TV subscriptions from rivals stepping up their attack.
The majority of these feuds have not emerged the way some thought, at least not yet, and the stocks show it.
To be sure, the three firms have benefited from a flight to defensive, yield-focused equities, but also from impressive operating results led by — big surprise here — wireless, where competitive threats appear to be largely mitigated.
As reporting season gets underway this week, most analysts agree the stocks hold the strong potential for yet more upside. “We believe all three large wireless incumbents are positioned to report better-than-expected results,” Jeff Fan said in a recent note clients.
Even with vast wireline businesses, it is no secret the major engines behind the profitability for all three incumbents are wireless earnings.
That is why shares in all three suffered a momentary shock last December when Globalive Wireless Management Corp. was given the green-light from Ottawa to launch Wind Mobile. Wind was joined by smaller urban-focused providers Mobilicity and Public Mobile in May, and Videotron Ltee. in Quebec on Sept. 9.
But the last 11 months have shown the new entrant threat to be inconsequential so far. Incumbents have effectively blunted the impact with new products like Rogers unlimited talk-and-text brand Chat, Bell’s matching Solo plans and Telus’s response to re-pricing in Quebec.
“Apart from Videotron’s launch in Quebec, wireless competition remained stable this quarter,” said Jonathan Allen at RBC Capital Markets. “New entrants did not appear to have much of an impact — indeed they have begun slashing prices and offering larger sign-up subsidies — a possible sign that growth is proving challenging.”
For Rogers, an area that will be closely watched is profit margin. CEO Nadir Mohamed warned investors on the last quarterly call that it could face substantial subsidy costs in upgrading its huge iPhone subscriber base to the newest iPhone 4. That threat has also likely been overstated, analysts say, given the short supply of the iconic device since its July 30 Canadian launch.
Rogers, which is expected to report earnings per share of 79 cents and consolidated revenues of $3.187-billion on Tuesday, faced potentially far bigger subsidies expenses owing to its large lead in smartphone penetration relative to Bell and Telus, who each hold about half the base that Rogers does.
But supply constraints mean Rogers margins will be spared, at least until next quarter.
Rogers’ considerable smartphone base stems from a network advantage it held between until last November. It has been almost 12 months to the day that the Bell and Telus activated their joint “3.5G” network, allowing them to sell the iPhone and other advanced smartphones that Rogers provided exclusively until then. The pair have been gaining on Rogers lead since, and are expected to show a further even of share distribution when Bell reports on Nov. 4 and Telus on Nov. 5.
“We forecast the incumbents adding roughly equal ... market share this quarter,” Mr. Allen said. He expects the firms to gain between 120-130,000 new customers apiece — a far cry from a few years ago when wireless was booming, but perhaps an achievement in 2010.
Price, though, has been sacrificed to get growth among those harder-to-find market segments (as one can see with Chatr’s unlimited plans). Analysts see flat to negative trends on average revenue collected per subscriber again this quarter, even as more people convert to smartphones and rack up data charges.
“With data substitution and competition in voice services intensifying, we estimate voice revenue decline continued to accelerate,” Phillip Huang at UBS said in an Oct. 14 note.
Mobile repricing — contained to voice services for now — underscores how new competitive threats are changing market conditions, as well the relative maturity of the wireless industry. Flat to lower revenue trends are now forcing Rogers, Bell and Telus to ramp up efforts to grow home broadband and TV subscriptions.
Bell, which is expected to report earnings of 74 cents a share on $4.496-billion in revenue, introduced its Fibe TV and Internet packages in Toronto and Montreal in the quarter, preceded by the launch of the Optik bundle by Telus in June. Both firms are banking on the bundles to offset wireless pressure going forward and analysts will be looking for an indication on how the new products are being received.
“We will be looking at Telus’s TV additions again this quarter to gauge whether the Optik IPTV offering is gaining momentum,” Maher Yaghi at Desjardins Securities said.
Mr. Yaghi estimates that about 30,000 subscribers were won by Telus (EPS of 73 cents on revenue of $2.469-billion) in the quarter, in line with the pace of acquisitions this year. It means chief Western Canada rival Shaw Communications Inc. will see a modest 2,000 reduction in its cable base, he and other analysts believe.
Bell just began selling Fibe in Rogers’ home market of Toronto in September, but may have had an impact its cable foe already, RBC’s Mr. Allen said.
“Our checks have found that Rogers has been actively contacting customers and offering large discounts,” he said. “It’s motivation is likely a desire to secure its customer base against Bell’s IPTV.”
These small-scale chess moves have had little influence over share values though, nor are they expected to after Rogers, Bell or Telus reports. With strong wireless performances and investors growing thirst for stable dividends, “we expect the recent moment in the stocks to continue for the rest of the year,” Mr. Yaghi said.
There are more bearish takes though.
“Canadian telco stocks are amongst the most expensive in the world,” Dvai Ghose at Canaccord Genuity wrote in a note this week. “We reiterate our fear that that we may be seeing a bubble develop ... that has been driven by an indiscriminate thirst for yield.”
He sees significant challenges that have perhaps gone undetected by the market, not least “unprecedented” discounting on wireless in recent months. Regulatory risks remain as well, with a review of foreign ownership rules now underway within Industry Canada that could hand new entrants big advantages in accessing foreign capital.
Whatever the impacts of the underlying shift will be, analysts say Canadian incumbents seem to be enjoying a relative sweet spot. The same can be said for their investors.
Financial Post
jasturgeon@nationalpost.com
No comments:
Post a Comment