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A Telecom Firm Empowered by Its Competitive Advantages

March 25, 2014 | About:

Bell Canada Enterprises Inc. (BCE) is the largest communications company in Canada. The firm supplies customers with wireless, home phone, internet, and television services. It also conducts a content media business comprised of brands such as CTV, TSN, BNN, Much Music, and The Globe and Mail. Moreover, it owns 45% of Bell Aliant Inc. (BLIAF), which is a small version of BCE operating exclusively in Canada’s Atlantic Provinces and in rural Ontario and Quebec.

Positioning

BCE is the largest local exchange carrier, internet service, and digital television provider. As such, the firm boasts a large customer base, infrastructure, and distribution network. These traits have generated economies of scale that allow the company to operate with a lower cost base than its competitors. Furthermore, BCE owns content. This powerful combination has enabled the firm to defend its market share, while generating high returns on invested capital.

Growth Drivers

Most of BCE’s revenue and earnings still stem from its declining fixed-line business, while its wireless and media divisions have become its growth drivers since 2008. Consequently, management has strategically laid focus on accelerating its wireless business, investing in broadband, and in the growing of its media division.

Along these lines, BCE recently made two major media acquisitions, namely Canada’s largest TV broadcaster CTV and its most important radio broadcaster, Astral Media. Through these purchases, the company got hold of roughly twice the viewership share of Shaw Communications, Inc. (SJR), its closest competitor in specialty television.

Additionally, the firm partnered with its rival Rogers Communications (RCI) to buy Maple Leaf Sports and Entertainment, the parent company of Toronto sports teams the Maple Leafs, Raptors, and Toronto FC. Through this purchase, both companies acquire free content for their sports channels. Furthermore, BCE stimulates its customers to contract all of their services with the company by allowing wireless subscribers to access their cross-owned channels on their mobile devices.

Airwaves Auction Changes Wireless Scenario

To remain competitive after 2008’s wireless spectrum auction, BCE entered into a joint venture with its telecom peer Telus Corp (TU) to upgrade its network, which resulted in increased roaming revenue for the company and the offering of a better smartphone lineup.

Early this year, a new auction held for the 700 MHz spectrum vacated by television broadcasters after their transition to digital signals resulted in a $565.7 million bid by BCE and $1.14 billion by Telus. Through this new spectrum acquisition, both companies will now be able to cover as many customers as market leader Rogers Communications.

Valuation

After the results of the auction were released, BCE’s shares remained flat, while Roger’s fell by 3% and Telus’s by 0.3%. Currently, BCE’s stocks trade at 18.8 its trailing earnings, a discount compared to the industry median of 19.3. Revenue, in turn, delivered a 3.30% year over year growth against its rivals’ 3% average. Moreover, the firm generated a healthy dividend yield of 5.27% compared to its peers’ average of 3.87%.

Consequently, the firm raised its dividend by 6% in early February, thereby taking its quarterly dividend to 61.75 Canadian cents per share. The company stated that this increase was the result of a higher-than-expected free cash flow generation and a positive business outlook for 2014. Investment guru Joel Greenblatt (Trades, Portfolio) recently incorporated BCE to his portfolio, supporting my bullish feeling about the company’s growth prospects.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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