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Buffett-Munger Highlight Weekly Report – Rogers Comm. (RCI)

May 10, 2011 | About:
gurufocus

gurufocus

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Rogers Communications Inc. (RCI) is a diversified holding company. As of Dec. 31, 2010, the company operated in three segments: wireless, cable and media. Its wireless communications operations are carried on by Rogers Communications Partnership (RCP) and Fido Solutions Inc. (Fido). Its cable communications operations are carried on by RCP and its subsidiary, Rogers Cable Partnership. Media refers to its wholly owned subsidiary Rogers Media Inc. and its subsidiaries, including Rogers Broadcasting, Rogers Publishing and Rogers Sports Entertainment. On November 4, 2010, it increased its ownership position in Cogeco Cable Inc. and Cogeco Inc. On Oct. 1, 2010, the company completed the acquisition of BV! Media Inc. (BV! Media). On July 30, 2010, the company completed the acquisition of Kincardine Cable T.V. Ltd. (Kincardine). On July 9, 2010, the company completed the acquisition of Cityfone Telecommunications Inc. (Cityfone).

Market Cap: $20.3 billion

Business Predictability: 5 stars

Industry: Wireless Communications

Analysis:

Rogers Communications is a diversified communications company providing wireless and cable services in Canada. Similar to its U.S. counterparts, this has been a growing business with the emergence of growing wireless and high data connections. The drive for more online content results in greater bandwidth requirements which in turns lead to greater demand for processing speed. This business model has both positive and negative aspects. Wireless service providers operate in a notoriously competitive industry. Maintaining a subscriber base is one challenge, but deal with price erosion is an entirely bigger challenge. With the growth of wireless data (as opposed to voice), service providers have been able to stem the pricing free fall – but this isn’t permanent. The cable side of the business operates as a regional monopoly which means high barriers and protected pricing. However, this is a business that requires a great deal of capital investment and is a very asset-heavy business. A great deal of the company’s consistent cash flows goes to building out and maintaining its networks.

Subscriber growth continues to be relatively robust on the wireless side due to the wide scale adoption of smartphones. This is also driving higher margin data service plans. Wireless revenue represents almost 60% of the overall mix with cable representing the remaining 40%. Both divisions maintain healthy operating margins and produce solid cash flow.

From an industry point of view, there have recently been some interesting developments in how network providers price their services and manage their traffic. One comes from Verizon Wireless, which finally got the IPhone from Apple and now threatens to throttle heavy users Customers who use “an extraordinary amount of data” and fall within the top 5% of Verizon data users might be subject to reduced data throughput speeds. The throttling will occur periodically during the current and next billing cycle at peak times and in locations with high demand, Verizon said in a statement. The second development comes from north of the border. A regulatory change in Canada has effectively killed unlimited Internet plans. Here we are talking about wired service for homes and businesses as opposed to mobile services. This is both an economic and political issue. The result of this new legislation is RCI is trying to move all of Canada onto tiered data plans as AT&T has done with its wireless services in the United States. It’s not secret that the amount of data being streamed over the internet continues to increase exponentially. It is probably no coincidence that Netflix recently began offering its streaming service in Canada. In any event, this has led to the question of whether Internet services are any different than any other utility.

Rogers’ first-quarter earnings report displays a very effective ability to adapt within a highly competitive landscape. Q1 revenues were up 3.9% to roughly CAD 3.0 billion ($3.13 billion) which was slightly below average estimates. The wireless segment showed the most strength where solid subscriber growth (up 3.5% from the year-ago period) offset the continued declines in the average revenue per user (ARPU, down 2.7% Y/Y). This segment represented almost 60% of overall sales. In the quarter, there was a record selling of smartphones - 190,000 to first time customers which helped to offset the pricing declines in the post-paid segment. While this smartphone loading continues to pressure wireless margins (down nearly 3 percentage points to 48.9%), the firm was able to cut postpaid churn (now 1.23%) on a sequential basis for the first time in a year. With nearly half of its postpaid base on higher-end smartphones, and data now driving more than a third of the firm's wireless network revenue, the segment's long-term profitability outlook remains bright.

Although, the firm struggles to hold margins steady on the mobile front, cable margins were at a multiyear high. While some of the margin expansion was driven from the acquisitions of data businesses Atria and Blink, the firm's efficiency improvement initiatives seem to be working well. Keeping costs under control will be important for maintaining high margins in this division. Financially, Rogers continues to produce hefty amounts of free cash flow which allows the company to buy back approximately 9 million shares while using another CAD 170 million to pay dividends. This is significant given the choppy operating landscape in which the firm is currently competing. The firm's superior customer base and heightened mobile exposure offers plenty of opportunity for future growth.

Valuation:

Ratios – P/E (ttm) 13.5X

P/S 1.59X

P/B 5.2X

EV/EBIT 13.5X

Discounted Cash Flow Analysis –

10 year growth Margin of Safety
>10% 35%
10% 27%
<5% 9%


Financials:

Book Value / Share Return on Equity Return on Assets
Dec 2010 $7.01 39.9% 8.8%
Dec 2009 $7.48 34.6% 8.7%
Dec 2008 $7.69 21.2% 5.9%
Dec 2007 $7.49 13.8% 4.2%
Dec 2006 $6.85 14.8% 4.4%
Dec 2005 $5.82 -1.3% -.3%
Dec 2004 $4.49 -2.8% -.5%
Dec 2003 $3.92 7.5% 1.6%
Dec 2002 $3.38 22.2% 3.7%
Dec 2001 $5.69 -20.2% -5.3%


Risk:

- Significant debt levels.

- Heavy capital intensive business.

- Highly competitive industry and pricing.

- Volatile average revenue per user (ARPU).

- Changing regulatory environment.

Conclusion:

Rogers Communications is a well run communications company with good competitive position with its industry. Pricing and its subscriber base will be important metrics to follow as the company deals in a hyper-competitive market.

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About the author:

gurufocus
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.6/5 (13 votes)

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