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November 02, 2007
Rogers Communications Reports Another Good Quarter
Rogers Communications reported another excellent quarter with revenues, EBITDA, EPS, and free cash flow rising 13%, 26%, 61%, and 91%, respectively. These figures were at the high end of analyst estimates with the Cable and Media segments providing material upside to EBITDA. EBITDA and profit margins at wireless were a little lower than expected but that was caused almost entirely by much better than expected subscriber growth. I'll gladly trade a few million dollars in EBITDA for an extra 50,000 subscribers relative to estimates of 150,000 subscriber additions. The results helped RCI shares hold up reasonably well as the market got slaughtered on Thursday. By mid-day Friday, the shares were rallying against a still weak market, up almost $2 and hitting a new all-time high. I think the positive reaction is a correct interpretation of the results and more upside remains.
With three quarters under their belts and having just completed a better than expected quarter, RCI management stated that they have a "generally positive bias toward exceeding the higher ends of certain guidance." Specifically noted were EBITDA at Wireless, Cable, and on a consolidated basis, net subscribers at Wireless, and consolidated free cash flow. It is quite clear that RCI is sustaining momentum in its wireless and cable businesses at the current very high level. This bodes well for 2008 guidance which will begin to be provided in January when subscriber growth goals are announced.
Also on the agenda for sometime in the December through February time frame is an update on how the company plans to use its suddenly flowing free cash flow. On the earnings conference call, Ted Rogers ruled out large acquisitions. I expect some combination of higher annual dividends, special dividends, share buybacks and additional investments in its businesses. One thing I like about RCI is that they always talk about how much more work they have to do to prepare their businesses for competition. There is plenty of free cash flow to go around and the eventual announcement should be a positive for the shares....
....RCI's Wireless business seems to be weathering the introduction of wireless number portability (WNP) in Canada earlier this year. Retention spending is up but it is paying off in record low churn levels and net subscriber additions. Rogers operates the only GSM network in Canada which gives it a significant competitive advantage as it battles Bell Canada and Telus for subscribers. WNP remains a risk but it appears to be diminishing.
The other major risk is the possibility of new entrants into Canada's wireless market via upcoming spectrum auctions. Without government subsidies, the buildout of new networks is uneconomical. There have been rumblings of large subsidies but nothing definitive. The new spectrum represents headline risk but is unlikely to have a financial impact for several years.
I am sticking with my long position on RCI. The shares are up 78% this year. A few more dollars and they will hit the level at which my position control discipline tells me it is time to trim. Plenty of upside remains however, with increases to 2008 estimates likely, several more years of very visible double digit growth, and a reasonable valuation of under 9 times current 2008 EBITDA estimates. I think the shares have a good shot of heading north of $60 next year and I find the stock a very attractive core holding through at least mid-2008.
Posted by Steve Birenberg at November 2, 2007 01:59 PM in RG
1.THE MARKET IN GENERAL APPEARS VERY FRAGILE AT PRESENT.CETV JUST HAD A TREMENDOUS SURGE IN PRICE DESPITE THAT FACT. IF A LARGE CORRECTION/BEAR MARKET STARTS IN THE US MARKET WITHIN THE NEXT 6 TO 18 MONTHS, HOW MUCH DO YOU FEEL CETV /MICC AND THE EUROPEAN.ASIAN MARKETS ETC. WILL BE AFFECTED?
2.WHICH OF THE HIGH FLYERS IN THE MARKET AT PRESENT[I.E APPLE,BAIDU,GOOGLE] IS LEAST SPECULATIVE AND IS BASED ON THE BEST UNDERLYING FUNDAMENTALS.
3 IF YOU WERE GOING TO DIVERSIFY FROM CETV ETC.,
WOULD IT BE ACCEPTABLE TO GO INTO APPLE ,GOOGLE AND/OR BAIDU OR WOULD YOU SWITCH ALTOGETHER OUT OF HIGH BETA STOCKS INTO GOLD,OIL,CASH ETC.
4.IT SEEMS TO ME AS IF TRUE VALUE FOR CETV AND MICC AT PRESENT COULD BE AS HIGH AS $140.HOWEVER,WITH THE THEIR HUGE RUNUP IN PRICE OVER THE LAST 2 MONTHS AND WITH THE ELEVATE VIX DETERMINATION IN THE OVERALL MARKET,BOTH ARE CERTAINLY AT RISK TO SIZEABLE,SHORT-TERM
PULL BACKS.ANY IDEAS HOW TO BEST MINIMIZE RISK AT THIS POINT WITH DIVERSIFICATION,INTERMITTANT SELLING, PUTS ETC. AND YET TO CONTINUE TO STAY
LARGELY INVESTED IN THESE COMPANIES AS CORE HOLDINGS?
1. I think any major correction in the US, say 10-20% will be mimiced by world markets. Emerging markets would perform worse. Look back at the declien from mid-July to mid-August to see what you could expect from markets in general and CETV and MICC in particular.
2. I think Google and Apple and RIMM have better fundamentals and more real underlying asset value than Baidu. That said, all will lost at least as much as the market if we get sharp correction or bear market.
3 and 4. I would not diversify out of a CETV or MICC into other high fliers. ALl will suffer together if a market event leads to a decline. I would just take some profits, as I have in CETV, and hold cash and await an opportunity to buy it back lower or then move to one of the other high fliers. Deep out of the money puts might be a good play as well but it will be expensive protection that will only come in handy if the market really gets whacked. I am very confident that if the market cooperates CETV can be $150-200 in one year. I view it as a core holding and am therefore willing to take downside risk while I trade around the core position.
Posted by: Steve at November 4, 2007 05:08 PM