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The purpose of this series is to highlight stocks that are undervalued, profitable, underperformed the market, and have a favorable technical outlook. The stock that I will be covering for my undervalued series this week is Rogers Communication (NYSE:RCI). RCI stock has fallen 15.22% in the last quarter compared to the S&P 500 (NYSEARCA:SPY), which has fallen only 0.64% in the last quarter. I believe RCI is a solid undervalued long-term choice to gain exposure to the communications industry in Canada. RCI has three major business segments, Wireless, Cable, and Media, which make of the majority of the business for RCI. The Wireless division is the largest division of RCI and I believe the most important going forward because of the value it is creating.

The last earnings report for RCI highlights some key factors that are driving the growth in wireless, which are the switch to smart phones, and the accompanying increase in data usage. The earnings report shows that data revenue as a percentage of network revenue rose from 39% in the June quarter of 2012, to 46% this year in the June quarter. This increase in data revenue can be explained by the comment from management in the report saying:

"For the three months ended June 30, 2013, Wireless activated and upgraded approximately 678,000 smartphones, compared to approximately 629,000 in the second quarter of 2012. This addition of smartphones increased the percentage of subscribers with smartphones to 72% of Wireless' total postpaid subscriber base at June 30, 2013, compared to 63% at June 30, 2012. These subscribers generate significantly higher ARPU, are less likely to churn than non-smartphone subscribers and typically commit to multi-year term contracts."

Because more customers are using smart phones, RCI has seen an expansion of the average revenue per user for data rise from $23.20 in 2012 to $27.13 in 2013, which is a substantial increase. In addition the comment from management shows that customers are less likely to churn and more likely to commit to long-term contracts so that should keep the business stable even in rough times in the economy.

Value

To value RCI I will be using a DCF calculator, with data for earnings and growth coming from Zacks.com, benchmark data from longrundata.com, and CPI data from the BLS. The DCF table below shows shares of RCI is undervalued by 24.98%, which represents a good opportunity for price appreciation for shares of RCI.

EPS [ttm]: $3.56

Long-term Growth Rate: 3.92%

Earnings grow for next: 5 years

Level off: to 1% after

Benchmark return: 10 yr annualized SPY return of 7.13%+2.0% inflation= 9.13% benchmark


(Click to enlarge)

Technical Outlook

The chart below shows that shares of RCI have been in a steep decline over the last 4 months following a breakout in late 2012 and early 2013 to new highs. RCI stock has come all the way back to near where it broke out in 2012; the chart below shows that strong level of support [Red Line] at $38.27. This level is extremely important because it was at that level shares broke below in the middle of 2012, and then broke out above in late 2012, and now in 2013, shares have tested this level with the recent steep decline in the stock. Technically, I believe the stock will hold this level of support and continue upward towards my fair value estimate, which is a couple dollars short of the high of $52 shares hit earlier this year.


(Click to enlarge)

Catalyst

The biggest catalyst long-term catalyst for Rogers Communications is the continued growth in smart phone and data usage. More and more subscribers are switching from "dumb phones" to smart phone, which will lead to increased margins & revenues for RCI, and if management's predictions about less churn and an increased willingness to sign a long-term contract continue to hold true, I believe RCI will continue to thrive, and take advantage of mega trend of mobile.

The biggest short-term catalyst is potentially also the biggest risk for RCI. Today news came out that Verizon (NYSE:VZ) and Vodafone (NASDAQ:VOD) were once again talking about a sale of Vodafone's stake in Verizon Wireless. If this occurs Verizon could end up spending $100+ billion to buy the stake back, and that would divert resources away from the prospective buyout of the Canadian wireless company Wind Mobile. I suspect the news of these buyout talks is the reason RCI is up nearly 3% today on the news. If the deal were to fall apart, then this would be a risk to RCI because then Verizon would most likely turn back towards expanding into Canada.

Risks

The biggest risk to RCI is the threat of increased competition from outside companies. In June Verizon went into talks with Wind Mobile with goal the goal potentially acquiring wind mobile to gain access to the Canadian wireless market. While Wind Mobile is not a large player, if Verizon did purchase them, it would give them a foot in the door, and the opportunity for expansion, which could take away profits from current wireless customers. As outlined above, the risk of this occurring would be significantly decreased if Verizon bought the Verizon Wireless stake from Vodafone.

Closing thought

I believe shares of RCI are poised to move higher from current levels, because the stock is undervalued, the stock is near a key level of support, and the underlying business is expanding and becoming more profitable. In addition, RCI has a well-covered dividend of 4.34%, and over the last 5 years has bought back nearly 19% of its shares outstanding. I believe all of these factors I believe shares of Rogers Communications in the long-term will move higher to my fair value estimate of $50.04.

Disclaimer

Source: Undervalued Stock Of The Week: Rogers Communications