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.