Rogers Communications (RCI) (TSX: RCI.A and RCI.B) reported ordinary third quarter results. However, the stock is attractively valued compared to its peers. Currently, it is trading near its 52-week low. I believe this is a good opportunity to buy the stock at a cheap price.
Rogers is one of Canada's leading telecommunications and media companies. It offers its customers wireless voice and data communications services and cable television services. Rogers' wireless and cable businesses are operated by its wholly-owned subsidiary, Rogers Communications Canada. The company offers its radio and television broadcasting services through Rogers Media, its another wholly-owned subsidiary. The company has three reportable segments, which are wireless, cable, and media.
Third Quarter Results
The company's Q3 2019 total service revenue came in at C$3233 million, down 1% YoY, driven by 2% decrease in wireless service revenue. In wireless, although Rogers registered flat revenue, I believe its introduction of unlimited data plans will result in stable revenue growth in the coming quarters. After shifting to "Rogers Infinite" plans with unlimited data, the company has completed its first full quarter in Q3. Infinite adoption was three times the rate the company anticipated. It has now 1 million subscribers. ARPU and data usage are growing satisfactorily, the company said. The company added 103,000 postpaid subscribers.
The company's cable revenue grew 1% in Q3, driven by 7% growth in Internet revenue. The company added 41,000 Internet subscribers. I expect growth of cable revenue will continue to grow with growth of customers opting for cable network-based unified Internet services. The company's media revenue was down 1% due to the sale of its publishing business, excluding the impact of which media revenue would have increased 2%. Media revenue is expected to grow due to growing adoption of digital marketing by people.
In Q3, Rogers increased its adjusted EBITDA by 6% to C$1712 million and free cash flow by 22% to C$767 million, which are encouraging. Wireless adjusted EBITDA grew 4% in Q3 on flat revenue, which implies the company continued to achieve cost efficiency improvements.
The rise of multimedia and Internet-based applications are fueling wireless data growth. Rapid growth in e-commerce, online gaming, and online education are also driving wireless data growth. Rogers is building networks for supporting the growth in wireless data. Mobile commerce is also growing at a rapid pace. Rogers is investing in the 4.5G and 5G technologies for benefitting from growing data demand. In Canada, wireless market penetration is approximately 87% of the population and there is room for further market penetration. In this scenario, Rogers' revenue growth will be in the positive territory for a long time. The company continued to make investments in its network and spectrum holdings and invested C$1.7 billion for 600 MHz spectrum licenses this year.
With demand for wireline telephone services declining and television content increasingly being available online, the demand for cable has been moderated. In this changed scenario, Rogers is offerings customers faster broadband Internet with download speeds of 1 Gbps and Internet service with unlimited bandwidth. For offering such speeds, Rogers is preparing its networks for higher speed and capacity with DOCSIS 3.1 and fiber-to-the-home (FTTH) technologies. Driven by Internet, Rogers' cable business is expected to grow slowly but steadily over the next few years.
In media, Rogers' ownership of content, particularly live sports and other premium content, plays an important role in acquiring and retaining audiences. This, in turn, attracts advertisers and subscribers. Media business is a low growth business. With growing consumer demand for digital media and on-demand content, I believe Rogers' media business will continue to grow modestly in the years to come.
Competition is intense in the Canadian telecom market. Rogers primarily competes with BCE Inc. (BCE), TELUS Corporation (TU), and Shaw Communications Inc. (SJR). Rogers is the largest player in the telecom industry in Canada. Rogers competes with the companies just mentioned on quality of service. Rogers' competitive advantage lies in the depth and breadth of its technologically advanced network including its unique mix of network and media assets. Being the largest telecom company in Canada, Rogers has the financial muscle to deploy sophisticated technologies across its network. Rogers has ensured that its service is top quality in every segment. The company can now charge premium pricing for its services. However, premium pricing cannot be charged for every service due to competition. Such pricing can only be charged for premium services such as premium video-on-demand service.
Rogers' most similar peers are TELUS Corporation, BCE, and Shaw Communications. Rogers' non-GAAP forward PE ratio is 14.70x compared to TELUS' 15.98x, BCE's 17.69x, and Shaw's 19.04x. Rogers' trailing 12-month price to sales ratio is 2.12x compared to TELUS' 1.93x, BCE's 2.37x, and Shaw's 2.66x. Rogers' trailing 12-month price to cash flow ratio is 7.18x compared to TELUS' 7.03x, BCE's 7.43x, and Shaw's 9.04x.
Rogers is attractively valued compared to its peers. However, it is an indebted company. It has ended the third quarter with a debt leverage ratio of 2.8x, which was up from 2.5x at the end of 2018. This was due to its acquisition of 600 MHz of spectrum licenses at C$1.7 billion, as mentioned above. As long as the debt leverage ratio remains below 3x, there is nothing to be worried about. The company has increased its consolidated adjusted EBITDA by 6% in the third quarter. If this trend continues, I believe the company will be able to keep its debt leverage ratio below 3x.
I believe Rogers is a "buy" around the current price. Telecom companies are low-growth companies. I believe Rogers' revenue will grow at a CAGR of 3.5% in the next five years. Its trailing 12-month revenue is $11,366.6 million. At a CAGR of 3.5%, its 2024 revenue will be $13,500 million or $26.44 per share. In the last one year, Rogers' stock has traded at the price to sales multiple of 2.06x and 2.47x. Applying a price to sales multiple of 2.47x, I get $65.31 as Rogers' 2024 stock price.
Apple's (AAPL) latest iPhones and iPads have a new technology, known as embedded Subscriber Identification Module (e-SIM). This e-SIM technology will allow users to switch between carriers. Carrier-provided SIM card won't be needed. If Apple or other smartphone makers continue to introduce e-SIM technology in Canada, customers will be under no contractual obligation to remain with Rogers. This could negatively impact Rogers' business.
Radio spectrum is a fundamental asset without which a wireless business cannot be run. The company must have the financial ability to renew current spectrum licenses and acquire new spectrum licenses. If the company fails to do that, it won't be able to offer its customers its current services or start new services. In such cases, the company's ability to retain existing customers and attract new customers will be adversely affected.
The company uses encryption technology to protect its cable signals from unauthorized access. It uses sophisticated encryption and security technologies to protect its Internet service from unauthorized access. However, there is no assurance that these technologies will work effectively all the time and unauthorized decoding of television signals and Internet signals won't happen. If the company fails to prevent unauthorized cable and Internet access, including premium video-on-demand and subscription video-on-demand, its cable revenue growth could be negatively impacted.
Wireless data growth is Rogers' primary growth driver. The depth and breadth of its technologically advanced network support wireless data growth. The company's unlimited data plan was a huge success with 1 million subscribers at present. Rogers is a good business to own for the long term. Investors are advised to accumulate the stock around the current price.
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.