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Rogers – Value in the North

Pat Dorsey’s informative book, "The Little Book That Builds Wealth," highlights that most companies with economic moats from Morningstar coverage universe are in the media sector. Rogers Communications Inc. (RCI) is a diversified communications and media company in Canada. The company has been widening its moat over the last six years that I have been following it. Rogers is also majority controlled by the family of Ted Rogers. I think the recent 16% correction in Rogers (RCI) presents a good opportunity to start a position in a media company with strong growth prospects which is trading at a reasonable valuation.

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I) The Record

Rogers (RCI) business has performed exceptionally well over the last 5 years which includes the great global recession of 2008/2009. EPS increased from $1.99 in 2008 to $3.43 in 2012. Dividend has increased from $1.00 in 2008 to $1.74 in 2012. Over the last 10 years (2002-2012) RCI has returned 654% compared to 99% return for SPY.

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II) Business and History

Below is a brief history and timeline of Rogers as per the company website:

Rogers (RCI) was started in Canada by Ted Rogers in 1960 while in law school when he bought CHFI, a struggling FM radio station and built it into a successful enterprise. Ted Rogers founded Rogers Cable TV in 1967 by acquiring Bramalea Telecable. In 1989 Rogers sells U.S. cable assets for over $1 billion profit and invests profits in the wireless sector. In 1995 Rogers becomes the first cable company in North America to launch commercial high-speed Internet service when it launches service in Newmarket, Ontario. In 1999 Microsoft, AT&T and British Telecom invest in Rogers. In 2000 Rogers acquires the Toronto Blue Jays major league baseball team. In 2001 Rogers Media acquires control of Sportsnet from CTV and renames it Rogers Sportsnet. In 2001 Rogers Cable launches High Definition Television (HDTV) in Canada and in 2002 Rogers launches GSM wireless network. In 2002 Rogers Cable launches Video On Demand which was renamed as Rogers On Demand in December 2003. In 2004 Rogers acquires the SkyDome stadium in Toronto. Also in 2004 Rogers buys back AT&T's interest in Rogers Wireless for $1.8 billion. In 2008 Rogers Wireless launches the Apple iPhone. After Ted Rogers passes away in 2008 Nadir Mohamed becomes President and CEO of Rogers in 2009. In 2012. Rogers completes purchase of 37.5% stake in Maple Leaf Sports and Entertainment the company that owns the Toronto Maple Leafs, Raptors, Marlies and Toronto FC as well as real estate and television properties.

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III) Operations and Competitive Advantages

As per company website:

“Rogers Communications Inc. is a diversified Canadian communications and media company engaged in the telecom and media businesses. Rogers Wireless is Canada's largest wireless voice and data communications services provider and the country's only national carrier operating on the combined world standard GSM/HSPA+/LTE technology platforms. Rogers Cable is a leading Canadian cable services provider, offering cable television, high-speed Internet access, and telephony products, and together with Rogers Business Solutions, provides business telecom, data networking and IP solutions to small, medium and large enterprise, government and carrier customers. Rogers Media is Canada's premier group of category-leading broadcast, specialty, print and online media assets, with businesses in radio and television broadcasting, televised shopping, sports entertainment, magazine and trade journal publishing and digital media.”

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Majority of Rogers revenue (58%) and profits (63%) come from the wireless segment. Rogers wireless has an ARPU of $60 in 2012. Rogers continues to invest in its wireless infrastrucure and remains focussed on innovation to retain its lead in the wireless segment in Canada. Rogers has 9.5 million Canadian wireless subscribers. This accounts of 27.5% of Canadian population of 34.5 million. The Cable and Business segment represents 29% of revenue and 34% of profits. Out of 9.5 million households in Canada Rogers has 2.2 million cable television subscribers and 1.86 million high speed internet subscribers. Media and Entertainment segment accounts for 13% of revenue and a small 3% of profits.

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Competitive Advantages

These are some of the competitive advantages:

1. Rogers has an oligopoly (with regional monopoly in Ontario) in the Canadian wireless, cable and media industry. Rogers competes with Bell and Telus in the wireless segment in Canada. Rogers competes with Bell (BCE), Telus (TU), Shaw (SJR), Cogeco (CGEAF) and other providers in the cable television and internet. Rogers counts almost 30% of Canadian population as customers.

2. The wireless and cable business has large amount of up-front costs and ongoing fixed costs. This makes it very hard for any new incumbents to succeed. Mobilicity and Public Mobile launched in Canada in 2008 but are on their way to becoming bankrupt in the near future.

3. Rogers offers its customers bundled service discounts and wireless and cable device upgrade discounts which increase customer retention.

4. Rogers has the best wireless network in Canada which is a 4G LTE Network which covers 60% of Canada. This is a major advantage.

5. Rogers owns sports teams and sports content and other entertainment assets. Sports content helps increase customer loyalty and is a major plus.

6. Rogers has well diversified operations and is majority owned by family of founder Ted Rogers and this allows the company to focus on the long term growth of the business.

IV) Balance Sheet and Profitability

Below is some information taken from the 2012 Annual Report and 2013 AGM Presentation. Rogers currently has approximate debt of $10.5 billion and debt/equity of 2.6. Rogers in 2012 had revenue of $12.5 billion and operating earnings of $4.8 billion and EPS of $3.43. Over the last five years EPS has grown at a rate of 15% per year. This includes the worst recession in recent memory during 2008 to 2009. Pre-tax free cash flow in 2012 was a strong $2.0 billion which was $3.88/Share.

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V) Management

Ted Rogers the founder ran Rogers from 1960 until his passing in 2008 and created exceptional value for shareholders over five decades. Mr. Nadir Mohamed took over and serves as the chief executive officer of Rogers. He started as chief executive officer in 2009 and has done an excellent job reducing expenses, keeping debt in check and increasing wireless investments to grow market share and earnings. Nadir Mohamed plans to retire in January 2014. Three members of the Rogers family who own controlling stake in Rogers (majority of Class A voting shares) sit on the Rogers Board and an international search for a new CEO is ongoing.

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VI) Value and Price

Rogers (RCI) is currently trading in the $43 to $44 range as of June 13. Below is some information about 2013 guidance from company 2013 AGM Presentation.

I believe this price is below the intrinsic value of the company when considering the growth prospects and competitive advantages. Rogers is expected to grow revenue by 3% to 5% and plans to repurchase 2% or more of shares via a $500 million share buyback. It is highly like that Rogers may be able to grow EPS by 8% to 10% in 2013 to $3.7 to $3.8. Rogers is trading at forward P/E of 11.5 which is a significant discount to peers in North America. Rogers has diversified operations and strong competitive advantages and there is a high likelihood of consolidation in Canadian Telecom sector in late 2013 and 2014 despite the concerns of the Canadian government.

Mritik Capital suggests that investors seeking 10% total return per year over next five years can purchase Rogers at prices below $42 on a dip. This would provide entry at 4.1% yield and forward P/E of 11. Investors looking for higher return can sell $45 January 2014 puts in excess of $6 on a price dip and either get assigned at prices below $40 or earn an annual return in excess of 22% per year.

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VII) Catalysts

I believe the following will act as catalysts over the next three to five years:

1. RCI will continue to execute on its strategy of focussing on retaining the existing customers and increasing ARPU at a rate above inflation. This will grow the per share intrinsic value.

2. New entrants to Canada’s wireless market in 2008 are looking at going bankrupt over the next 12 months and they will be eligible to sell their spectrum to incumbents when the five year lockup expires in November 2013. There is high likelihood of a wave of consolidation in the Canadian Telecom market.

3. Canada has 80% penetration rate in wireless customers which is one of the least penetration rates in the developed world. This allows for continued growth for Rogers over next three to five years.

4. Continued innovation from Rogers in mobile payments, wireless video anywhere and targeted acquisitions in sports and media can add value.

VIII) Specific Risk

As in any investment there are risks associated with an investment in RCI. Following are some of the risks:

1. Digital media competition including Netflix could prove to be more significant than anticipated. Rogers is investing to stay ahead of the curve and its bundled service offerings is a major advantage.

2. Canadian government could impose more regulatory restrictions that could impede Roger’s growth. Given that Canada is opposed to foreign entrants this is unlikely to have a significant impact on Rogers.

3. A sharp increase in interest rates could increase Rogers cost of capital significantly and weight on profits.

4. U.S. and non-Canadian investors need to consider the foreign exchange risk (Current CADUAS = 0.98). Canada is a developed nation with a rich resource base and well educated work force and has good economic prospects in the long term. However a near term downturn in Canadian Housing and resource sectors could weigh on the Canadian Dollar.

5. Rogers has dual voting stock with members of family of Ted Rogers holding majority of the Rogers Class A voting stock. This is something to consider for investors in non voting Class B stock.

IX) Why Is This Cheap?

I believe Rogers (RCI) is currently undervalued when considering its rich history of value creation and strong growth prospects. On a relative valuation basis compared to US peers like Verizon (VZ) and AT&T (T) as well the company seems undervalued. The market is undervaluing RCI for the following reasons:

1. The actions of the Canadian government over the last month have brought down the valuations in the Canadian Telecom Sector incumbents Rogers, BCE and Telus.

2. The market is worried about the strong competition in the wireless segment which accounts for 63% of RCI profits.

3. The market is worried about emerging digital media competition.

4. Foreign investors may be selling RCI due to a possible near-term decline in the Canadian dollar.

5. RCI dual voting stock is a deterrent for many investors.

Disclosure

I own shares of RCI, BCE.

Comments and questions welcome.

Read more:

1. RCI 2012 Annual Report

2. Statistics Canada 2011 Census

3. BCE Investor Relations

4. Telus Investor Relations

5. Shaw Communications

Note:

I have used information from the RCI investor presentations and financial statements. I have referenced information from Yahoo Finance and Statistics Canada.

About the author:

MritikCapital
Mritik Capital Inc. is a financial advisory firm with focus on identifying quality businesses with durable competitive advantages that are undervalued. Our first goal is to preserve the capital of our clients and look for strategies for enhancing their net worth based on opportunities that present compelling risk adjusted reward.

Please note that investing offers both risks and rewards. Before investing do your own due diligence and consult your financial advisor.

Visit MritikCapital's Website


Rating: 4.3/5 (47 votes)

Voters:

Comments

MritikCapital
MritikCapital - 1 year ago
Verizon interested in entering Canadian Mobile market and expresses interest in Wind Mobile. This could be interesting. I hope this leads to further correction in Canadian Telecom majors RCI.BCE,TU.
buynhold
Buynhold - 1 year ago
Mritik:

Are there reason(s) you prefer Rogers to Shaw?
MritikCapital
MritikCapital - 1 year ago
Hi Buynhold,

Thanks for reviewing and comments.

I have nothing against SJR. I think it is a well run company and the Shaw family has done a good job of growing shareholder value and dividends over the years. I have been following RCI & BCE more closely over the last few years and I wonder whether they have better growth prospects due to greater scale and diversity including wireless and media assets. SJR spun off their media content holdings under Corus Entertainment a few years back,

Also when I look over last few years record of earnings growth and hence share price gains SJR vs RCI it makes me wonder whether RCI is a better buy right now due to prospects for higher growth.

If you have done more analysis on SJR and have more insight I would greatly appreciate hearing more of your thoughts on this.

Best Wishes.

stevenramsey
Stevenramsey - 1 year ago
This a good overview, but frankly, I'm wondering why you wouldn't just stick with DirecTV, since the gap in price to value is so much larger and the case for DTV was much more compelling.
MritikCapital
MritikCapital - 1 year ago
Hi Steven,

Thanks for your comments. Here are my thoughts.

I like DTV for their competitive position in Latin America and their management acumen. I am already long DTV as you are aware. I do have some hesitation with increasing my position currently as it is difficult to predict how US operations will be 5 years from now. I am also interested to see if DTV will be acquiring Hulu (at a reasonable price) and how they can blunt the threat of NFLX and other digital providers.

One thing companies like RCI, BCE have is an integrated offering and an existing customer base where they can bundle the services. This is a competitive advantage. I am also keenly looking for a correction in LBTYA, LMCA as I do like the consolidation of telecom in Europe and taking on long tern fixed rate debt at these rates may not necessarily be that risky for cash generating businesses.

I will watch the telecom and media space closely over the next few months.
buynhold
Buynhold - 1 year ago
Mritik,

I am unfortunately not up to date on Shaw (I used to own it till 2007, but have not followed it since). When I bought Shaw in 2003, they were heavily buying back shares, and I considered their management to be less aggressive than Rogers', so I went with them.

Over the last few years, Shaw seems to have made some substantial acquisitions, whereas Rogers has been buying back shares. That in itself should make Rogers' per share earnings growth look better than Shaw's. Without digging deeper I can't tell if Rogers is indeed performing better than Shaw, or is likely to going forward. It's shares have definitely done better lately, but that doesn't tell us anything :).

I am wondering if you see any earnings driver(s) that set Rogers apart from Shaw.

stevenramsey
Stevenramsey - 1 year ago
Mritik,

Makes sense, just my preference to stay put in DirecTV. And while I'm an advocate of thinking independently, if Malone is in it or doing something with it, I should probably do it too. At Liberty Media's annual meeting last week, Malone and Maffei said they both still own their shares of DirecTV and expressed confidence in the company. Also, Lou Simpson, Longleaf, and Tedd/Todd (of Berkshire) made significant additions to it in Q1. So that's my reason for keeping a bigger position in it.

Liberty Global is making a play on Kable Deutschland. The expansion continues.

Liberty Interactive (LINTA) is buying back shares at 10+% annually and in the recent annual letter Maffei/Malone said the market undervalues the strength of the QVC business model. When you take into account their 36% stake in HSN, LINTA effectively has a monopoly on home shopping.

And Starz (STRZA) is compelling too, as they trade at a low multiple to cash flow (7-8x EV/EBITDA) and most acquisitions in the content space are in the 15-18x range.

All in all, Malone is well-positioned in all of his top holdings. And if he follows you into Rogers, major kudos to you. Maybe I'll start following you around as well!

MritikCapital
MritikCapital - 1 year ago
Hi Steven,

Thanks for sharing your thoughts. You do seem to follow the Liberty companies pretty well and I am sure this update is very helpful to lot of folks.

I missed the dip ($20) on LINTA a little while back so missed that opportunity to add to my position. I saw the interview of QVC CEO on Bloomberg and I like their focus.

I plan to hold my shares of DTV and all my Liberty related companies for the long term.

Long DTV,LMCA,LINTA,LVNTA,LBTYK.
trinathdasari666
Trinathdasari666 - 1 year ago
Very Nice Article
MritikCapital
MritikCapital - 1 year ago
Hi Trinathdasari666,

Thanks for reviewing the article.

Hi Buynhold,

I need to do more due diligence on SJR. I will follow this company more closely over next few months. Totally agree with you that RCI share price gains alone do not tell us anything useful. It is the continued increase in net income and EPS (accelerated by buybacks) which impresses me.

In terms of earnings drivers that RCI has over SJR I would review the following:

1. RCI has wireless which has strong growth prospects due to potential for further conversion of customers to smartphones. SJR bought spectrum in 2008 but have decided to not enter the wireless market and sell the spectrum to RCI.

2. Mobile Video Streaming and TV Anywhere services could be the next big think. This is what Charlie Ergen of Dish is trying to achieve in US market with his strategy to consolidate DISH, S, CLWR. RCI has already made progress on a similar strategy. Rogers TV Anyplace phone, tablet, pc applications allow users of rogers cable to view the content anywhere.

3. RCI has ownership of sports and other digital media content. RCI owns 37.5% of Maple Leaf Sports and Entertainment (MLSE) and 100% of Toronto Blue Jays. They also own sports channels like SportsNet etc and other entertainment and news channels like City TV . People like watching live sports so it is highly likely to be suited for mobile entertainment and this can be a difference.

4. Bundling of services and having one bill and discounts can be an attractive proposition. RCI can do this including the Cell Phone & Tablet data plans where as SJR may not be able to for Cell Phones.

5. Rogers is looking to expand its service area and its tie-up with Videotron to expand into Ottawa and Quebec could be a catalyst.

I am sure there are some positive catalysts for SJR that I am not aware of as I have not followed the company closely. So I will need to look into this further.

MritikCapital
MritikCapital - 1 year ago
Wind Mobile Canada future in question as foreign investor drops bid.
Cornelius Chan
Cornelius Chan - 1 year ago
Would like to read your take on Vimpelcom sometime... since you have such a keen edge on the telecoms analyses.
MritikCapital
MritikCapital - 1 year ago
Hi C.W.R,

Thanks for reviewing and the interesting pick. I will look further into this company which looks like a diversified global telecom trading at low valuation. It is an ADR so my comfort level is less and it may not be easy to analyze the various parts. Looks like selling $10 Dec 2013 puts nets > 20% annual return with the risk of owning this equity at $9.
MritikCapital
MritikCapital - 1 year ago
Respected Canadian Telecom Analyst Maher Yaghi has done some sensitivity analysis of scenario where by VZ enters Canadian wireless market and captures 15% market share over the long term. He feels the odds of VZ entering are low due to entrenched Canadian competitors and VZ may be more interested in acquiring VZ Wireless stake from VOD. However if this were to happen he sees a hit to EBITDA of 6% to 13% and downside for Canadian telecoms from 10% to 18%. His price target for RCI is C$51 and has a Hold rating. He prefers BCE with C$50 price target which has relatively less exposure to wireless compared to RCI & TU.
MritikCapital
MritikCapital - 1 year ago
RCI and VZ related article from Chris Katje with some interesting thoughts.
MritikCapital
MritikCapital - 1 year ago
Verizon offers 0-million for Wind, holds talks with Mobilicity. I think RCI below $40 may offer good value.
MritikCapital
MritikCapital - 1 year ago
John Malone's thoughts on Cable and Satellite industry outlook and trends including musings on DTV, CHTR, DISH.
MritikCapital
MritikCapital - 1 year ago
John Malone's comments on Cable Consolidation and Media companies at Allen & Co Sun Valley, Idaho conference. Malone said when it comes to cable TV programming cable lost out to the satellite industry. But he thinks its appeal is the fact that cable is the primary supplier of broadband connectivity, and it happens the cable networks are ideal to grow their speeds. Thus the cable industry is better positioned to evolve than anyone else and demand for broadband is rising. .

Out of 9.5 million households in Canada Rogers has 2.2 million cable television subscribers and 1.86 million high speed internet subscribers.
MritikCapital
MritikCapital - 1 year ago
RCI to report earnings tomorrow. It will be interesting to hear commentary from management. RCI has been making a set of moves including accelerating innovation, refining the service plan offerings etc to position itself to compete better in case VZ does get permission to and does decide to enter Canadian market. It will be interesting to see if VOD does decide to sell its 45% stake in VZ Wireless to VZ as that may have some impact on VZ decision on entering Canada.
MritikCapital
MritikCapital - 1 year ago
RCI reports adjusted diluted EPS of $0.96 for 2Q 2013.

Canadian Telecom companies fight back to win the PR war and to block Verizon's entry into Canada.

BCE presentation arguing against subsidized entry of US Wireless providers to Canada.

Rogers CEO Nadir Mohamed's comments on speculated Verizon's entry into Canada.

MritikCapital
MritikCapital - 1 year ago
Verizon not planning to enter Canada as it moves forward with VOD deal. Canada to go ahead with spectrum auction as planned in January 2014 with deposits due September 2013.

This re-iterates the moat that Canadian Telecom companies have and puts a question mark on the viability of 4th national wireless player in Canada. It is hard to justify the cost of adding the cost of another wireless network to Canadian market which has large geographical area and much less population compared to US or major European nations.

MritikCapital
MritikCapital - 1 year ago
Canadian 700MHz spectrum Jan 2014 auction deposit deadline closed on noon 17 Sep 2013. List of bidders to be released on 24 Sep 2013. With VZ not interested and AT&T likely not finding it economically viable, in addition to BCE, RCI, TU it seems that most likely additions may Norway's Telenor which has an interest in Wind Mobile and VOD in case they want to put the refundable deposit in and explore further. Due to the economic moat enjoyed by the big 3 incumbents the going will be very tough for any new entrant and will likely involve atleast 5 years of investments and losses before turning any profit assuming they can. Although there has been lot of uncertainty there has been very less risk for investors in RCI in my opinion.
MritikCapital
MritikCapital - 1 year ago
No major threat to Canadian Wireless Incumbents as per list of 15 companies that applied for 700 MHz spectrum Jan 2014 auction. There is likely going to be elevated regulatory risk and government interference in the sector until next Canadian election but the risks are more than priced into the current prices for RCI, BCE, TU.
MritikCapital
MritikCapital - 1 year ago
RCI reports 3Q2013 results.

Revenue Grew 2% to $3.2 Billion with Adjusted Operating Profit up 4%. Adjusted 3Q 2013 EPS $0.97 compared to $0.96 for 3Q 2012. Pretax Free CashFlow/Share for Q3 2013 was $1.21 up from $1.15 in 3Q 2012.

I was a bit surprised that there was not much of buyback activity although share price did dip to C$40 from July to September. I suspect they want to see how the Jan 2014 spectrum auction goes are thus being prudent.

RCI currently trading at Forward P/E of<12 assuming $3.7 2014 EPS.

This compares to CMCSA which trades for Forward P/E of 17, VZ which trades for Forward P/E of 14.

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