Life is usually pretty good for Canada’s telecommunications companies. Competition is limited to three major players, barriers to entry are overwhelming, and profits are steady. But lately one of the big three, Rogers Communications, (TSX:RCI.B)(NYSE:RCI) has been struggling.
Last year was a turbulent one for the telecommunications giant. Most notable was the prospect of Verizon Communications (NYSE:VZ) entering the Canadian market, although that ended up not happening. Also the Canadian government lowered the maximum contract on wireless contracts from three years to two, which went into effect in early December.
The new year has not been any kinder to Rogers. The shares are down 10% so far in 2014 after the company reported disappointing numbers in its most recent earnings call. Adjusted earnings in the fourth quarter of 2013 were 20% down year over year, and wireless growth now severely trails that of chief rival BCE (TSX:BCE)(NYSE:BCE). Rogers did at least raise its dividend, although the increase was only half of what most analysts expected.
Rogers’ shares have certainly become much more unpopular, and as a result the company trades at a discount to its peers. BCE and Telus (TSX:T) both trade at over 18 times earnings, while Rogers trades at less than 14 times. But is such a discount appropriate, or is it overly harsh?
While there have certainly been concerns about anaemic growth, many investors are also concerned about new CEO Guy Laurence’s plan to shake up Rogers, which could potentially create some disruption. The company is in the midst of an operational review, which should be presented to the board in May. Certainly there are opportunities to improve customer experience, something that Mr. Laurence has made a top priority.
But most importantly, the fundamentals are still intact for Rogers. Limited competition and a subscription-based revenue model have made for relatively smooth earnings, which is what investors nowadays covet most. The company should have no problem meeting its raised dividend, which (thanks to the depressed stock price) now yields over 4%.
Foolish bottom line
There are plenty of industry headwinds, including limited growth and increasing wireless regulation. But those factors certainly affect Rogers’ rivals as well. So the discount for Rogers shares is probably more than the company deserves, making it a great choice for investors who believe in Canada’s telecommunications sector.