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April 30, 2007

Rogers Communcations 1Q07 Earnings Preview

Rogers Communications is expected to report 1Q07 EPS of 18 cents on revenues of $2.03 billion. Those figures appear to be in US dollars but the company will report in Canadian dollars so look for about 15% more on both in the press release.

RG has been growing very rapidly over the past year thanks to its wireless business with cable providing an added bump. I expect 1Q07 to show a continuation of these trends. This should be good news for the stock but the likely privatization of BCE Inc. (BCE), Canada's largest telecom company, has taken precedence in recent stock price action for RG. RG shares have risen by 20% since late March. I think projected 2007 results support the current price but without the BCE news bringing the prospect of private equity taking a run at other Canadian telecoms, I don't think the shares would be this high already....

I have always though RG was a takeover candidate but timing is contingent on family patriarch Ted Rogers, who may never sell. The logical acquirer is Comcast, but private equity may represent a good alternative if, and that is a very big if, Ted Rogers decides he is willing to sell or have a partner. I think the possibility is real enough that RG shares are unlikely to give back more than 10% of their recent gains if the takeover speculation subsides. 2007 estimates support a $38 stock price and 2008 estimates can justify at mid-$40s price. As a result, barring an unexpected shortfall in RG's operating fundamentals I am comfortable holding the shares and buying on weakness.

In 1Q07, RG should report revenue growth of 12% and EBITDA growth of 26%. Growth will be driven by the wireless business, which is the #1 provider in Canada. Wireless revenues are projected to grow 14% with service margins expanding by 400 basis points to over 46%.

Cable will also continue to contribute to RG's strong growth with revenue and EBITDA growth growing 15%. RG's growth is closely tracking that of US cable operators, driven by the triple play offering of TV, high speed data, and telephony.

A couple of other things to look for in the conference call Q&A include updates on guidance, capital spending, and use of the company's growing free cash flow and balance sheet strength. I think it is too early in the year for RG to update guidance but 1Q results will probably suggest the high end of range is within reach. Capital spending discussion will be focused on the rollout of RG's high speed wireless network. Regarding free cash flow, management has promised a mid-year update. May 1st may be too soon but RG shareholders should be rewarded soon with a significant use of cash flow and capital structure to enhance shareholder value.

Posted by Steve Birenberg at April 30, 2007 10:48 AM in RG