This is Part 3 of a series of articles in which I have been analyzing the biggest telecom companies in the U.S. and Canada. The companies being analyzed here are AT&T (T), Verizon Wireless (VZ), Rogers Communications (RCI), BCE, Inc. (BCE), and TELUS (TU). Part 1 of my series looked at where the companies currently stand in terms of valuation, debt and growth metrics. Part 2 looked at the dividend of these companies and whether they are sustainable.
While pursuing my interest in learning to identify specific metrics that are used to analyze telecom companies, I found the following metrics: churn, EV/sales, EV/EBITDA, EV/subscriber, ARPU, subscriber acquisition costs (SACs), and subscriber retention costs (SRCs). With some effort, most of these metrics could be obtained. However, BCE and TU were the only contenders that published their subscriber acquisition costs or their costs on acquisition (COA), while none of the contenders published the SRC. Therefore, these later two metrics will be excluded while the others will be presented in this article. I should remind readers here that my objective is to select either T or VZ and either RCI, BCE or TU in my dividend portfolio and feel confident about these picks.
The first metric that I will explore is the churn rate. This measures the stability of the customer base. The percentages found in Figure 1 represent the proportion of customers who leave the company. The lower the churn rates the bettern as the company will be pressured less to replace lost subscribers and revenue.
Click to enlarge images.
Source: Company annual reports.
Each of the contenders has churn rates equal to or below 2.00%. T has decreased its churn rate since its height of 2.70% in 2004 to a current 1.37%, nearly a 50% reduction. VZ and TU have the most consistent churn rates with ranges of 1.17% to 1.50% and 1.33% to 1.68%, respectively. Since 2009, Verizon's churnrate has been decreasing, whereas TU has been steadily increasing since 2006. RCI had a successful decrease in its churn rate from 2004 (1.93%) to 2009 (1.06%); however, over the last two years the churn rate has been increasing and was 1.32% in 2011. BCE has experienced an increasing churn rate since 2008, which has reached 2.00% in 2011. I would suggest that VZ appears to have the best consistent churn rates over this period, which has the added bonus of decreasing of late. This may further indicate indirectly the satisfaction of its customers with its services.
The second metric is the enterprise value to sales ratio (EV/sales). Although this is more of a valuation metric, it provides us with some useful information. A low value is considered better because this indicates that the company has high sales relative to its value. The metric further indicates how much it costs to purchase the company's sales. It is similar to the price-to-sales ratio (P/S) in that a higher value suggests a more unattractive or overvalued share price. Therefore, in our comparison, we would want to see steady or decreasing values. Figure 2 presents the EV/sales ratio for the contenders from 2003 to 2012.
At first glance, one would notice that each of the contenders EV/sales ratios increased in 2012 from 2011. VZ had the lowest in 2012 with 1.48, which is considerably less than T who is next at 2.04. RCI, BCE and TU are all close to each other at 2.80, 2.69 and 2.61, respectively. In fact, since 2008 and 2009, RCI, BCE and TU have been increasing fairly quickly. Looking over the years, VZ has had the lowest EV/sales ratio of all the contenders since 2005, suggesting that it is an attractive option and undervalued compared to the other contenders. Looking at the graph, VZ's EV/sales line is fairly flat, which is what we are looking for here.
The third metric is the enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA). This metric helps make fair comparisons of companies with different capital structures. Similar to the price to earnings ratio (P/E), it can measure the value of the stock. It measures the price (EV) that we would pay for the each dollar of the company's cash flow (EBITDA). Here, too, the lower the ratio the better. Figure 3 presents the EV/EBITDA ratio for the contenders from 2003 to 2012.
VZ currently has the most attractive EV/EBITDA among the contenders at 5.82. This is noticeably lower than T, which is at 8.21 and better than the BCE, which has the second best ratio at 6.48. VZ can be considered undervalued compared to the other contenders. It also has had one of the lowest EV/EBITDA ratios since 2005; however, it has been relatively increasing since 2008. The other contenders all had a shock where their EV/EBITDA ratios increased suddenly. From 2010 to 2011, T increased 39.74%, BCE increased 20.96%, and TU increased 18.76%. Once again, VZ is the more attractive choice.
The fourth metric looks into the subscriber growth and EV/subscriber. The subscriber growth is important as a source of increasing revenue and market share. Wireless subscribers are becoming more prominent as more and more people are terminating their traditional landline services and are opting to use their cellular phones as their primary source of contact. Wireless services is no doubt going to be the primary revenue source of telecoms shortly, if not already. Figure 4 shows the growth in wireless subscribers from 2006 to 2012.
Source: Company annual reports.
VZ and BCE were the only two contenders that had increased their subscribers in 2012 from 2011. Of particular note is RCI, which has had a slowing wireless subscriber growth since 2006 and resulted in an increase of only 1.09% in 2012. A similar trend is observed with TU; however, its growth is still doing fairly well compared to the other contenders. T has been having some difficulty adding new subscribers at the double digit rate it was enjoying prior to 2011. In fact, the drop in subscriber growth from 2010 to 2012 is quite serious. VZ has the best annual subscriber growth average from 2006 to 2012 with 12.68%. BCE has the lowest average at 5.06%. From all this, VZ appears to me to be in a better position than the other contenders.
The EV/subscriber ratio shows us the company's value per customer. Although there is barely anything online to describe how to interpret this metric, I have found that a lower value is most desired as it suggests that we are paying less per customer or that the company has more customers relative to its value. This could also be an indirect measure of a company's efficiency in terms of how much company is needed for just one customer. I would look at it as getting more subscribers for your buck. Figure 5 presents the EV/subscriber ratio from 2005 to 2012.
Source: Company annual reports, Gurufocus.com.
As with most of the other metrics analyzed thus far, VZ had the lowest EV/subscriber ratio in 2012. VZ has also had the lowest ratio of all contenders since 2006. Verizon's EV/subscriber has increased very slightly since 2010; however, I would not consider this an issue. I would, rather, describe this as steady and consistent. VZ could be said to be increasing the company value and the number of subscribers equally. This makes the stock quite attractive. T has also had its EV/subscriber ratio decrease since 2006 except for the slight increase in 2012. BCE and TU have seen increases in their ratios for several years now. TU itself is nearly tied with RCI in 2012. TU had been experiencing a fairly steady decline up until 2009. BCE on the other hand has sported the highest ratio of all contenders over this entire time period. Once more, VZ has the better results.
To conclude this article, Figure 6 presents the average revenue per user (ARPU) from 2006 to 2012. This information was a little tricky to obtain. AT&T only reports proportional changes and not the actual dollar values. Verizon changed the manner in which it reported the ARPU, then split it up into different types and then simply did not report it at all. Rogers, BCE and TELUS were the only companies that reported the ARPU consistently. ARPU is seen as the next important source of revenue for telecom companies as more and more customers switch to or are encouraged to adopt a smartphone. More and more people are also acquiring tablets. All of these devices have data packages available and in some cases (in Canada at least) you are forced to have a data package with certain devices. From Figure 6 we would like to see increasing ARPU's proportions as this could be reflective of increased smartphone and tablet adoption, as well as the company's ability to transition customers to these devices. It may also be considered an increasing source of revenue for telecom companies.
Source: Company annual reports.
As is apparent in Figure 6, RCI and T have both had decreasing ARPU growth as of 2012. Both of the contenders have also had decreasing ARPU growth since at least 2010. BCE and TU have been able to increase their ARPU since 2010 with BCE now having the highest ARPU of all contenders in 2012 (excluding VZ since it has no reported blended ARPU in 2012). What is even more important is that BCE has only had one year (2009) in which the ARPU has decreased from a previous year. Another particular note is VZ's positive ARPU growth in three out of the four years when data was made available. If 2012 were still positive, it would be longest streak out of all the contenders. It is also important to note that while all the other contenders remained flat or had a decrease in the ARPU, VZ actually increased the ARPU. I would lean toward BCE over VZ in this comparison, as BCE has a history of being able to tap this revenue stream from its customers consistently and at proportions that have been higher than VZs.
This article looked at some of the suggested business metrics used to analyze telecom companies. Verizon had the best results in five out of the six metrics from this analysis. Some of the metrics further suggested that Verizon is undervalued compared to the other competitors. RCI, BCE and TU rarely had better metrics than T or VZ except in the case of BCE, which appears to be a powerhouse in increasing its ARPU. In my final article, I will look into insider trading and then pull all this together in order to make my selection.