Move over, BCE and Rogers. Investors have a new telecom favourite
The Federal Court of Appeal’s approval this week of Rogers Communications Inc.’s takeover of Shaw Communications Inc should be bad news for Telus Corp, the company most strongly opposed to the $20 billion deal.
So why is Telus the best performing telecom stock so far this year?
The share price of the Vancouver-based company is up 8.7 per cent in 2023. That’s well ahead of Rogers, which is up about 2 per cent, even though the Toronto-based company stands to gain from expanding its national footprint when it adds Shaw’s network, assuming the deal closes.
Telus is also ahead of Shaw, which is up 1.7 per cent this year but still below its takeover price of $40.50 a share. And Telus is leading Quebecor Inc. whose Videotron subsidiary will buy Shaw’s Freedom Mobile wireless business after the Rogers-Shaw deal closes.
Telus has also gained more than BCE Inc. a popular stock because of its telecom-industry-leading 5.9 per cent dividend yield. BCE shares are up 4.8 per cent in 2023.
Admittedly, four weeks is a short period of time to measure share price performance. Stock returns look different when the time horizon is stretched to three months or one year, given that Telus has fallen behind some of its peers over some longer periods.
Yet January’s upbeat returns suggest that investors may be looking beyond the Rogers-Shaw deal as a pivotal event within the Canadian telecom sector. Perhaps they see other factors giving Telus a boost, even as the deal – which still requires final approval from the federal Industry Minister – threatens to raise the competitive pressure on the company’s home turf in Western Canada.
Enthusiastic investors may be onto something here. Mutual fund managers are overwhelmingly in favour of Telus relative to other telecom stocks, based on CIBC Capital Markets data showing that institutional investors have significantly overweighted the stock relative to its weighting within the S&P/TSX 60 Index.
As well, CIBC Capital Markets analyst Stephanie Price this month upgraded Telus to “outperformer” from “neutral” – the equivalent of moving to a “buy” recommendation from “hold” – based on what she believes is a discounted valuation for the stock.
And RBC Dominion Securities analyst Drew McReynolds recently singled out Telus as his top Canadian telecom stock pick. This week’s ruling from the Federal Court of Appeal, which he believes is good news for Rogers, Shaw and Quebecor, didn’t changed that view.
In his outlook for the telecom sector – released earlier this month and based on the assumption that the Rogers-Shaw deal will be approved – Mr. McReynolds said that Telus was his only “outperform” recommendation in the sector.
His reasoning: The telecom sector could struggle with stock valuations that are hardly cheap, given high price-to-earnings ratios. The sector is also vulnerable to a recession, which could weigh on profit growth.
He expects Rogers’s share price will rise to $69 within 12 months, but that’s just 6 per cent above its current price. His target price for BCE is $63, which is less than 2 per cent above the current price and suggests investors will be collecting little more than dividends over the next year.
However, Telus stands out from its peers with a target price of $34, which implies a gain of nearly 20 per cent.
According to Mr. McReynolds, Telus is compelling for a couple of key reasons.
It has largely completed the expensive work of installing fibre-optic cable to homes and businesses, which means that the company’s capital expenditures will likely fall 31 per cent this year from last year. That will drive free cash flow to $2.7-billion, or well more than double the estimate of $1.1-billion in 2022, which is money that can be used to pay down debt.
As well, he expects that Telus will see its EBITDA (earnings before interest, taxes, depreciation and amortization, which is a measure of profitability) rise by a peer-leading 10.4 per cent in 2023.
That’s twice the pace of what Mr. McReynolds expects from Rogers, and is partly based on Telus continuing to grab significant internet market share and reporting strong growth in its non-telecom health technology and agribusiness divisions.
No doubt, there could be volatility ahead for Canadian telecom stocks as investors weigh high interest rates against a looming economic downturn, and Telus isn’t immune to shifting conditions. But if January is any indication, the Rogers-Shaw deal may be old news as investors focus on a new favourite.