As the Canadian wireless scene opens doors to new entrants such as Freedom Mobile of Shaw Communications Inc. (TSX:SJR.B)(NYSE:SJR), I believe the once low-volatility play will suffer from larger stock price fluctuations and could actually deliver modest results for investors when compared to years in the past.
In the good, old days for Canadian telecoms, the Big Three incumbents enjoyed a lack of competition, cartel-like pricing power, rock-bottom interest rates, and less interference from the CRTC. But it appears that these days are coming to an end, as the telecom industry gets shaken up.
Telus beefing up organic growth potential via small tuck-in acquisitions
There’s no question that Telus and the other two Big Three players will be facing major long-term headwinds from here. Over the next five years, it’ll be a battle to keep up growth expectations for investors as wireless subscribers gradually start to jump ship to the cheaper, up-and-coming Freedom Mobile, which is aggressively beefing up its network.
Telus is slated to spend a huge amount on network upgrades to “keep up with the Joneses,” all while interest rates are going up. That’s going to be a huge drag on the stock over the medium term, but management has been looking at other areas to beef up organic growth to partially offset the upcoming headwinds that are mounting.
Telus’s subsidiary Telus International recently announced the acquisition of a 65% stake in Xavient Information Systems for US$250 million. The tuck-in deal appears to fit Telus’s previous tuck-in deals of Kroll and Voxpro (55% stake) well , all of which should widen the company’s growth runway going forward while headwinds ramp up.
The stock currently trades at a 22.35 price-to-earnings multiple, a 3.3 price-to-book multiple, and a 7.7 price-to-cash flow multiple, all of which are slightly higher than the company’s five-year historical average multiples of 17.4, 2.9, and 7.5, respectively. The stock is slightly overvalued based on traditional valuation metrics, but I believe the stock is substantially overvalued when you consider the headwinds that the company will face over the next five years and beyond.
While Telus has made some tuck-in deals that should help its top and bottom line, I do not believe it’ll be enough to weather the incoming storm of Freedom Mobile, which I believe is a serious competitor that will put immense pressure on Telus over the coming years.
The 4.22% dividend yield and upward trajectory of the stock may seem promising, but Telus’s growth runway is about the get rockier, and if you’re not willing to re-adjust your expectations, you could be in for some major disappointment.
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Joey Frenette owns shares of Shaw Communications Inc.