On May 7, 2014, we issued an updated research report on Rogers Communications Inc. (RCI).
Rogers has delivered negative earnings surprise in all four quarters last year, with an average surprise of negative 6.74%. The company reported weak first-quarter 2014 financial results, where its bottom line missed the Zacks Consensus Estimate.
Despite significant LTE network expansion, innovative service launches and an attractive dividend yield, Rogers’ Cable operations are currently facing severe competition. BCE Inc.’s (BCE) entry into cable TV services is imposing competitive pressure, and may likely slash Rogers’ market share and impede cap margin expansion.
Rogers’ Media segment was affected by continued softness in the advertising market. We believe that much of the Media segment’s growth is dependent on the strong viewership ratings of Rogers’ radio and TV broadcasting operations. To remain competitive, the company needs to heavily invest in new TV programs and channels. This may result in considerable cash drain from Rogers’ balance sheet.
Canadian regulatory authorities concluded that Canada’s wireless market lacks competition. The government asserted that having just three carriers on an average per market has stifled competition, thereby resulting in higher rates and lower penetration than many other countries.
In a bid to improve service and price through competition, the Canadian federal government has licensed four new operators. Through spectrum auction, five new entrants gained substantial regional holdings of AWS spectrum. These new participants are expected to intensify competition for the company by either teaming up with Rogers’ rivals.
Rogers has a highly leveraged balance sheet with a debt-to-capitalization ratio of 0.73. Senior notes totaling nearly $1.8 billion are scheduled to mature in the next two years and will further pressurize cash flow. Furthermore, increased dividend payment, an aggressive stock buy-back plan and deployment of 4G LTE across its footprints should further dent Rogers’ cash balance, in our view. We also believe that Rogers is fairly valued at the current level and the stock price is not expected to provide above-market gain anytime soon.
Moreover, weaker smartphone activations in the first quarter of 2014 and stiff competition from local players like TELUS Corporation (TU) and Shaw Communications Inc. (SJR) will continue to act as headwinds for the company while moving ahead.
Rogers currently carries a Zacks Rank #5 (Strong Sell).