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April 29, 2008

Excellent Quarter For Rogers

On Tuesday, Rogers Communications reported excellent 1Q08 results further allaying concerns that caused the shares to pullback from the low $50s before bottoming in the low $30s. Results at RCI's wireless business segment were better than expected across the board, providing plenty of support for the recent rebound in the shares to the low $40s and leaving room for additional near-term upside to $46-48. RCI also announced that it will rollout the iPhone in Canada later this year providing a superb weapon as competitoin in Canadian wireless heats up.

The only chink in the armor from the report came during the conference call when Ted Rogers repeatedly mentioned that RCI was beginning to feel the impact of the US recession and expected the impact to grow. Thus far, only collections have suffered as demand for wireless and cable services has held firm. To its credit management is already responding so I expect the financial effect to be modest but it does provide bears with a talking point.

There are further comments on the stock price below but this report was correctly greeted by a 4% jump in RCI shares to their highest close since January 3rd. Worries over increasing competition and slowing growth in the Canadian wireless market and RCI's vulnerability as the dominant industry leader have been proven wrong so far. More upside lies ahead for RCI shares, especially with introduction of the iPhone.

In 1Q, RCI enjoyed 14% revenue growth, 21% EBITDA growth, and reported EPS 2 cents ahead of expectations....

....RCI shares have been buffeted by two concerns over its industry leading Canadian wireless business. First, investors are nervous that spectrum auction at the end of May will create new entrants increasing competition and hurting profitability and growth. Second, 4Q07 results across the Canadian wireless industry saw slower sub growth and heightened pricing competition.

RCI's 1Q08 results directly rebut both of these issues. Wireless gross and net adds beat expectations, churn was lower than expected, cost per gross add fell, margins were higher than expected, service revenue grew 17%, and EBITDA grew 21%. All of these metrics show sequential improvement. Does this sound like the results of a business that is in trouble? On the contrary, this is a healthy business with a strong management team that is well positioned to respond to competition.

And in a further boost to RCI's competitive position, the company formally announced yesterday that it will be selling the iPhone later this year. This is an especially favorable development as the iPhone will be rolled out right as the new entrants are launching their businesses. As the industry leader with 50% share, RCI was likely to the target of new entrants and certain to cede some market share. The iPhone will give the company a weapon of its own to take share from the other incumbents, Telus and BCE, and keep the best customers on the RCI customer list.

The only issue I have with RCI is that it trades at a premium to its US and Canadian peers. It is a very well deserved premium but it does limit the upside and raise the risks if fundamentals unexpectedly soften. The shares trade at times what I now view as conservative guidance. I think they can reach $53, or 8 times 2009 estimates, later this year even against headwinds from new entrants and economic fears.

Posted by Steve Birenberg at April 29, 2008 04:10 PM in RG