Investors should now be market wieght on telecom.
Canadian telecom stocks have historically outperformed in the first half of the economy cycle (along with other “defensive” sectors), but thenunderperformed in the subsequent 52 weeks of the recovery phase. Using March 2009 as the market trough for the current cycle, we note telecom shares outperformed 20%-25% in the year leading up to March 2009 and then underperformed more than 20% in the subsequent nine months.
Underperformance historically ends around the time time that the bank of canada starts increasing
rates (June 2010?). Consequently, based on historical performance, RBC CM believes investors should now be market weight telecom.
But Stock Selection Is Critical: Rogers, Quebecor, BCE Our Best Ideas:
Given slowing subscriber/EBITDA growth rates for the large Canadian telecoms, RBC CM believes investors should focus on stocks with above average return of capital and/or superior operating growth prospects
Over the next few years, RBC CM believes Rogers and BCE will provide the greatest expected capital returns (dividends/buybacks). In the near term, RBC CM believes Rogers has the most upside to quarterly earnings. Meanwhile, cost cutting and a lower wireless exposure should help BCE shares. RBC CM likes QBR shares for superior growth prospects: 1) QBR shares have historically reacted well to subscriber momentum; 2) core margins are improving due to mix shifts; and 3) it believes QBR will generate significant value over time from its wireless business.
Downgrading TELUS, MBT, and BA S
RBC CM revised some of its rankings for 2010 based on implied returns and operating momentum and has lowered TELUS and Bell Aliant from Outperform to Sector Perform and Manitoba Tel (MBT) from Sector Perform to Underperform. For TELUS, the stock’s low valuation could provide upside over time, but the stock lacks momentum as wireless operations remain under pressure and cost cutting does not appear sufficient to offset margin pressures from TV and wireless. For MBT, RBC CM expects Allstream (and business markets in general) to lag the recovery and MBT’s low/negative FCF in 2010-2011 provide limited flexibility for capital returns. Finally, for Bell Aliant, RBC CM continues to favour the stock but the low implied returntarget and the headline risk about dividend cuts at the May 2010 AGM are mitigating factors.
In 2010, Incumbent Wireless Carriers Facing Various Head-WINDs.
RBC CM expects wireless competition to dominate headlines in 2010 as carriers roll out. So far, WIND Mobile (Globalive) has been the only carrier to launch. Expect another four launches this year: Public Mobile in Toronto any day now; DAVE sometime in the first half of the year (Toronto plus various cities in the West); Videotron after July 1; and Shaw just before year-end (or early 2011).
RBC CM believes that the frequent newspaper headlines about wireless launches and competition will be a major headwind to investor perceptions and will likely cap valuation upside for the whole sector. If the impact of new wireless entranis still a year away, then ARPU may see a modest recovery from the broader economy. All of this leads RBC CM to believe that RCI estimates will be moving higher in 2010, especially for investors/analysts that have been expecting an immediate negative impact on RCI results.