RBC sees narrowing field in telecom stock-picking

‘Game of inches’ as competition intensifies

Competition between telecommunications stocks has turned into a “game of inches” as it becomes harder to differentiate between the big players, RBC Capital Markets concluded in its annual telecommunications outlook report.

Similar growth expectations, a tight valuation range and an expected lack of company-specific new business opportunities in the next year have RBC analyst Drew McReynolds struggling to pick between BCE Inc., Rogers Communications Inc. and Telus Corp. “We believe stock selection is boiling down to a ‘game of inches’ with it being

increasingly difficult for any one stock to ‘break out of the pack,’” McReynolds wrote.

RBC downgraded Bell and Rogers from outperform to perform and lowered both price targets by $1 to $60 and $55 respectively. Their ratings are now in line with Telus, which got a price target boost to $44 from $43.

Conversely, McReynolds upgraded Quebecor Inc. to a top pick and Shaw Communications Inc. to outperform because they have more room to grow in the wireless segment, which will continue to drive growth across the entire industry. (Quebecor operates Vidéotron in Quebec and Shaw runs Freedom Mobile, formerly Wind Mobile.) Analysts raised Quebecor’s target price to $44 from $43 and Shaw’s to $29 from $26.

Quebecor won top pick given its near immunity to increased wireless competition from Shaw, which largely operates in Alberta, B.C. and Ontario. Shaw got its ratings boost from expected growth driven by wireless, its Comcast X1 IPTV product and ultra-fast Internet.

While RBC expects stable growth for telecom stocks in 2017 due to skyrocketing data consumption and disciplined pricing, it noted growing downside risks including an expected rise in government bond yields, intense competition and cord-cutting. The Canadian Radio-television and Telecommunications Commission’s decisions on wholesale access rates — the regulator lowered interim rates much to the chagrin of big players — could also hurt incumbents’ bottom lines.

All telecom stocks, which tend to thrive when interest rates are low, will be affected if government bond yields rise as expected to 2.5-2.75 per cent, chopping the return expectation to zero to five per cent from an expectation of 10 per cent at constant bond yields.

McReynolds also expects competition to heat up between cable companies and telcos in both Eastern and Western Canada when it comes to the television and Internet segments. Bell and Telus continue to build fibre-to-the-home infrastructure and improve their IPTV services, while Rogers and Shaw offer ultra-fast 1 Gbps Internet and work on deploying IPTV using Comcast’s X1 platform.

Cord-cutting or cord-shaving — getting rid of television packages or choosing a smaller package — could continue to hurt broadcasting revenue, RBC noted. This year could be an inflection point for video-streaming, with 2017 to 2019 the period where over-the-top video services could “truly become a viable substitute for traditional television.”

RBC is also keeping an eye on whether the government sets rules for the 600 MHz spectrum auction, which could draw billions for additional wireless capacity.

Such rules, along with a final federal decision on Bell’s proposal to buy Manitoba Telecom Services

Inc., will indicate whether the Liberals intend to follow the previous government’s policy that aimed for four major wireless players in each market.

RBC will also watch for progress on debt repayment, the impact of new accounting rules under IFRS 15 and evidence of a sustainable recovery in Alberta.