Let’s be honest; Rogers Communications (TSX:RCI.B)(NYSE:RCI) delivered a stinker of an earnings report this week, and the market reacted really badly, sending the stock down almost 10% in one day and about 15% over the last six months.
The market has fallen out of love big time with this one-time favourite, but I am going to make a bold contrarian bet that Rogers will make up most of its recent losses in the next few months and climb higher in 2020. My regular readers know that I am a fan of Rogers based on its reliable and growing cash flow and its sharpened focus on the needs of its customers.
So, sit back and relax while I tell you how to buy Rogers against the grain right now and make a boatload of money by being greedy when others are fearful.
The top-line numbers
The market absolutely hated the revenue number that Rogers served up. Total revenue was stable this quarter, and total service revenue decreased by 1%, largely driven by a 2% decrease in wireless service revenue.
The wireless service revenue decrease was primarily driven by the faster-than-expected subscriber adoption of the new unlimited data plans, which therefore resulted in a decrease in overage revenue and an elevated competitive market environment.
Its no surprise that Canadians have an absolutely insatiable demand for data, and more Canadians are on the go, whether it be commuting to work or stuck in traffic while going to the grocery store. This means Canadians are burning through more data on their mobile devices than ever before. Historically, all the major wireless giants would have earned overage fees, as customers went above their monthly data allocations.
Recently, there has been a big industry change in the form of unlimited or “peace-of-mind” plans, which means that while customers are paying slightly more in monthly fees, they are paying a lot less in overage charges, which definitely hurts every one of the wireless providers — not just Rogers.
But let’s sit back and think a bit deeper about this. Customers are paying more in the reliable monthly fee number to take advantage of unlimited data. Over time, this will result in more reliable, higher-quality and less-lumpy quarterly and annual revenue numbers. While it will stink for a couple of more quarters, the market and investment community will readjust their expectations, which means the stock price is bound to stabilize.
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Getting all the bad news out while it can
Rogers made a very smart move as part of its earnings release. Not only did it serve up poor revenue numbers, but it shocked the market by lowering its overall 2019 revenue guidance. This threw the market for a real tailspin, because it took this as a sign of management incompetence or capitulation in the face of extreme competition.
However, I read this very differently. Earlier, Rogers had told the market that it would have a 3% increase in year-over-year revenues, and the company has now revised its 2019 revenue guidance to be flat to last year.
The company has done two things here. First, it has created low expectations for the fourth quarter, which means it may actually be able to beat those low expectations. Second, and perhaps more importantly, this will create a favourable environment for any 2020 revenue comparisons with 2019.
The lower the 2019 number, the better the 2020 number looks — simple math.
The final verdict
The reality is that Rogers is wildly cash flow positive, and investors will note that the forward guidance for 2019 cash flow is still positive relative to last year, which is a good signal.
What was also lost in the chaos of the revenue downgrade is the fact that the company grew its postpaid wireless customers by 103,000. In the wireless world, any type of net customer growth above 100,000 is seen as a very successful quarter.
The company has enough financial firepower to withstand any short-term turbulence, and smart investors will do very well to start accumulating a position around the $60 level to set up for a double-digit return in 2020.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Rahim Bhayani has no position in any of the stocks mentioned.