Before the open on Monday, Rogers Communications (RCI) announced 4Q07 subscriber growth below expectations, doubled its dividend, initiated its first ever share repurchase, and reported mixed 2008 guidance. In response, RCI shares fell 6.2%. I decided to hold off on writing up my thoughts until the smoke cleared and following a little defense by a couple of analysts, RCI shares bounce backed by 2.4% on Tuesday even as the market got drubbed in the afternoon.
RCI will be in the penalty box for awhile but despite the disappointing news I think the shares are cheap enough to hold especially given the facts that growth will still be excellent in 2008 on all key financial metrics and management is noted for its conservative guidance.
The problem at RCI is mostly with the 4Q07 wireless subscriber gain of 183,000 which fell 20,000 to 40,000 short of analyst estimates. Guidance for 2008 is a little under most analyst estimates pretty much across the board. RCI management tends to be conservative with guidance and might be more so this year given new entrants to Canadian wireless and stepped up promotional activity from Telus (TU). While the doubling of the dividend is excellent news, it was widely expected and the accompanying share repurchase is pretty small. I suspect management is keeping some powder dry in case it feels the need to respond more vigorously to the competitive wireless landscape in Canada….

….I think RCI shares will be slow to bounce back as they are lacking a positive catalyst. Furthermore, investors will be skeptical of the guidance given the 4Q subscriber shortfall. That said, support should exist in the upper $30s based on 2007 results and 2008 guidance. Growth in revenues, EBITDA, and free cash flow will be solid double digits in 2008 and the balance sheet remains very underleveraged. Support for the shares should also come from Canadian investors needing to reallocate funds from BCE about it goes private later this year. The new healthy dividend yield at RCI will certainly help in this regard.
The bottom line is that I think RCI longs should hold on, weather the storm and add on further weakness. That is what I am going to do at least until quarterly results are fully reported in mid-February.