Rogers Communications Deserves More Respect

| About: Rogers Communications (RCI)

Investopedia Advisor submits: Finally, Rogers Communications (RG) is starting to get the market respect it deserves. Investors should give it even more respect.

Rogers’ second quarter figures knocked the socks off analysts’ estimates with revenue of $2.23 billion, up 29%, and profits of $278 million, up from just $19.2 million. Following months of flat-line performance, Rogers shares have jumped 10% since the results were released this week.

Despite its higher $47.80 price tag, I still think Rogers offers loads of upside potential. Here’s why:

No other communications company in North America matches Toronto-based Rogers unique asset base. Rogers is the only stock that gives investors exposure to the “quadruple play” bundle of high-speed internet, broadband TV and digital telephony as well as wireless. This gives it a big competitive edge against Canadian market rival BCE Corporation (NYSE:BCE).

As the bundled service play gains momentum, Rogers will likely keep delivering impressive results over the coming quarters. Moreover, the market will start to recognize the gains from Rogers' heavy investment in high-speed networks over the years.

Back in April I recommended Comcast (NASDAQ:CMCSA) at $28.36 for similar reasons. Comcast is now trading at $34.00.

Investors ought to be thrilled with the $185 million in free cash flow that Rogers produced in Q2. With the bulk of network spending complete, even more FCF generation should be just around the corner, giving Rogers the chance to pare down its debt levels and up the stock’s 15 cents per share annual dividend.

Best of all, Rogers is considerably undervalued. Despite its “quadruple play” portfolio of assets, the stock is priced as if it were just a wireless telecom company.

Your average wireless telecom stock trades at about 9 times EBITDA. Let’s assume Roger’s wireless business is valued on the same multiple. With $1.75 billion EBITDA expected in 2006, the wireless business is worth about $15.8 billion – just a tad more than Roger’s current $15.1 billion market cap. In other words, investors who buy the stock at today’s price get a piece of Rogers’ cable and internet operations for free.

It’s not often that you can snap up a top-quality growth stock for a bargain basement price. By my reckoning, the market still hasn’t caught on to Rogers’s value. Even with its run-up, the share price still lags what the stock is worth. It has further to go.

RG 1-year chart:

By Ben McClure, Contributor - Investopedia Advisor

At the time of release Ben McClure did not own any shares in any of the companies mentioned in this article.

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