Now is the Time to Buy Telus

Shares of Telus Corp. (TU) have fallen 10% since the company reported second quarter results on Aug. 3, and 17% since climbing above $65 in July. This presents a good time to buy, since revised estimates on the Street imply a drop of only $2 to $3 per share, says RBC Capital Markets analyst Jonathan Allen.

While he acknowledges that pressure on the company’s wireless business could spill over into the third quarter and the results of next year’s wireless spectrum auction remain up in the air, Mr. Allen is confident wireless results at Telus will improve next quarter.

Its shares have more than priced in these risks, he told clients in a note, adding that “after a miss like this quarter, we believe management will be highly motivated to improve results, and find ways to surface value.

One way this could be accomplished is through a large recapitalization or share buyback. Mr. Allen thinks Telus could issue notes at favorable rates if it remains investment grade and introduces change of control and maximum leverage covenants.

Under his recapitalization scenario, which implies 3 times leverage and a $60 per share buyback, Telus shares would be worth between C$75 and C$85.

Mr. Allen continues to rate the shares at “outperform” with a C$74 price target. Telus closed at C$54.55 on Monday.

TU 1-yr chart: