How To Play TELUS Stock For U.S. Investors

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Includes: DELL, ERIXF, QCOM, TU
by: Value Capture Strategist
Summary

TELUS has a great business up in Canada and has cornered the mobile phone market in Western Canada.

TELUS is in a very good position because it has access to wealthy customers in western Canada and is going to remain profitable for the foreseeable future.

TELUS also has some strategic challenges with deciding which equipment provider to work with for the 5G communication standard rollout in Canada.

Investment Thesis

Avoid this stock because of its valuation. This is a good business and may be a good investment if there is a market correction of about 50%. At this valuation, the stock price is not attractive.

Introduction

TELUS (NYSE: TU) is a Canadian telecom provider with 12.7 million subscriber connections, including 8.6 million wireless subscribers, 1.7 million high-speed Internet subscribers, 1.4 million residential network access lines and more than 1.0 million TELUS TV subscribers.

Effect of Arrest of Huawei executive on TELUS 5G Rollout

On December 1, 2018, a leading executive and vice chairwoman of Huawei, a leading Chinese communications equipment manufacturer that supplies TELUS, was arrested in Vancouver, Canada. This arrest was a result of shady dealings with Iran that is prohibited by the US government. The US government has banned Huawei equipment from being used in deploying 5G communication standard because of fears of espionage. This has a direct effect on TELUS because it may have to work with other communication equipment providers because of the concerns with Huawei. This is important because it will cause TELUS to change its 5G rollout strategy. This is another strategic uncertainty that supports the investment thesis to avoid this stock at this time.

Financial Analysis

TELUS

PROFITABILITY INDICATOR RATIOS

2017

2016

2015

Gross Profit Margin

55.04%

55.75%

55.49%

Operating Profit Margin

19.20%

16.85%

18.74%

Pretax Profit Margin

15.39%

13.06%

15.33%

Profit Margin Analysis (Net Profit Margin)

11.06%

9.61%

11.12%

Effective Tax Rate

27.21%

25.63%

27.49%

Return On Assets

5.10%

4.52%

5.57%

Return On Equity

18.09%

15.69%

18.27%

TELUS’s gross profit margin remained flat from 2015 to 2017 because the goods and services purchased by TELUS remained flat during this period. Though the company’s gross profit margin remained flat, it did not influence the operating margin. And the company’s operating margin improved from 2015 to 2017 due to decreases in employee benefits, the depreciation of assets and the amortization of intangibles. The pretax profit margin also followed the same direction as the operating margin and we didn’t see a decoupling like the gross profit margin and the operating margin. As a result, TELUS’s pretax profit margin increased from 2015 to 2017 because of decreases in finance costs due to increased interest on long-term holdings and foreign exchange effects. Furthermore, TELUS’s net profit margin dropped from 2015 to 2017 due to a higher taxation. TELUS’s effective tax rate remained flat from 2015 to 2017, at around the 27%. The effect of lower net profit margin can be seen in the return of assets and equity. As a result, the company’s return on assets, equity dropped from 2015 to 2017 due to reduced profitability.

TELUS

DEBT RATIOS

2017

2016

2015

Debt Ratio

72.18%

71.45%

70.95%

Interest Coverage Ratio

4.59

4.39

5.16

Financial Leverage Ratio

3.55

3.47

3.28

TELUS’s debt ratio deteriorated from 2015 to 2017 because of increases in liabilities due to increases in long-term debt and accounts payable. The increase in long-term debt was due to increases in TELUS’s commercial paper and the addition of a new credit facility to fund its business. This deterioration of the debt ratio can also be seen in the lower interest coverage ratio. The company’s interest coverage ratio decreased from 2015 to 2017 due to reduced profitability, but TELUS’s interest coverage was still enough to cover any interest payments. TELUS’s financial leverage ratio increased from 2015 to 2017 thanks to increases in assets.

TELUS

INVESTMENT RETURN

2017

2016

2015

Price/Book Value Ratio

3.20

2.93

2.64

Price/Earnings Ratio

18.04

18.98

14.65

Dividend Yield

4.11%

4.61%

4.90%

TELUS’s price-to-book and price-to-earnings increased from 2015 to 2017 because of stock price increases due to improved investor sentiment in Canada. Thus, the increase in the stock price makes its valuation unattractive for investors. This increase in stock price drove up the price-to-book and price-to-earnings and is also the reason why its dividend yield dropped from 2015 to 2017. TELUS maintained the same dividend strategy, but its stock price appreciated.

Conclusion

TELUS has a very sweet deal in Canada, where it has cornered the west coast of Canada — British Columbia and Alberta. It has access to a wealthy populace in these provinces, so its business, while not likely to grow significantly in the next 3 years, will see steady profits and opportunities for price increases when it switches to 5G like its American counterparts in the south, including T-Mobile (NASDAQ:TMUS)/Sprint (NYSE:S), AT&T (NYSE:T) and Verizon (NYSE:VZ). TELUS may end up working with Qualcomm (NYSE: QCOM), Dell (NYSE: DVMT) and Ericsson (OTCPK: ERIXF) for its 5G deployment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.