When one Canadian stock equals two American firms
The top Canadian telecommunications stock plays the role of two American giants, says a U.S. advisory, which makes it a featured buy.
There are a lot of empty seats for baseball games in the Rogers Centre in Toronto these days.
Should that cause investors to hesitate about putting their money in the company that owns the place?
Not if you pay attention to a leading U.S. advisory.
Dow Theory Forecasts has a very precise set of criteria for measuring stocks. On a list of “Sector Standouts” in its latest issue, the lone telecom stock is Rogers Communications (TSX-RCI.B; NYSE-RCI).
Not content with that distinction, the advisory also singles it out as the featured “Analysts’ Choice” stock for this issue.
This is the second time in a month that the advisory has made a Canadian stock its top choice. Just a few weeks ago, the honour went to Research in Motion (TSX-RIM; NASDQ-RIMM) as we duly reported (see Daily Buy-Sell Adviser, March 29.)
In effect, says this advisory, Rogers is the equivalent of two major American firms wrapped into one.
Two companies in one
The “Toronto-based media giant,” says this advisory of Rogers, “has captured 37% of Canada’s wireless market and 30% of the country’s cable TV share.”
That makes Rogers two companies in one, suggests the advisory. It is the Canadian counterpart of both Verizon Wireless (NYSE-VZ) and Time-Warner Cable (NYSE-TWC) — in one company.
Aside from this multi-tasking role, the thing Dow Theory Forecasts likes best about Rogers is its ample cash flow.
Efforts to control costs and boost efficiency have borne fruit. The company’s operating profit margins have risen each of the past four years and Rogers has produced positive cash flow in 14 of the last 16 quarters.
“Rogers tends to return much of its cash to investors,” adds the advisory. The number of shares fell by 7 per cent in 2009 and the dividend has doubled since 2007.
In Toronto, the $1.28 dividend is yielding a healthy 3.7 per cent and the stock is trading at $34.57.
Number one
The advisory paints the picture of Rogers in both wireless and cable. With 8.5 million wireless customers, it is number one. Wireless in turn accounted for 38 per cent of Rogers’ operating revenues and 68 per cent of its operating profit last year.
Rogers has also captured one third of the country’s cable TV market, the advisory explains to its readers, even though it operates in just three provinces — Ontario, New Brunswick and Newfoundland and Labrador.
Overall, it has 2.5 million subscribers for basic cable, 1.66 million for digital cable, 1.62 million for cable Internet, and 940,000 phone customers. Cable generated 29 per cent of operating revenues and 29 per cent of operating profit last year.
Then there is the media unit with its collection of radio and television stations, magazines, Sportsnet and the home shopping channel. These amount to 13 per cent of operating revenues and just 3 per cent of operating profit.
Listed last among its assets are the once-proud Toronto Blue Jays.
A hot-button issue
“Canada’s cable industry has matured,” says this advisory, “and the explosive growth that powered wireless expansion in the past decade is moderating.” New uncertainties have crept into the market.
The CRTC’s March proposal to let broadcasters negotiate fees with cable and satellite companies may not be shocking news to American readers (the same arrangement already exists in the U.S.). But it is a hot-button issue in Canadian communications.
Rogers is vowing to take it to court, but even if it fails, the costs will be passed along to customers, the advisory comments.
Meanwhile, the three giants in the industry, Rogers, BCE Inc. (TSX-BCE) and Telus Corp. (TSX-T) find their 93 per cent share of the market challenged by four new licensed operators.
“While the industry issues are worrying,” concedes the advisory, “Rogers’ share price already reflects plenty of uncertainty, and the company seems capable of exceeding modest consensus expectations.”
Rogers is trading at less 15 times forward earnings, well below its three-year median price/earnings ratio of 19. Per-share profits should grow 3 per cent this year, 8 per cent next year and 11 per cent over the next five years, if Wall Street analysts are to be believed.
All of this makes Rogers a buy now and a Long-Term Buy — a best buy over the next 24 months — in this advisory’s opinion.
And when a Canadian stock can do the job of two American giants, it certainly merits some respect.
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