As they say, patience is a virtue, and the stock highlighted below could offer investors slow and steady returns. In addition, the company has potential catalysts that, if realized, could reward investors with a lift in the stock price.
The company
Quebecor Inc. is a telecommunications and media holding company with an 81-per-cent interest in Quebecor Media Inc. Quebecor has three key business segments. Its largest is telecommunications, with its core asset, Videotron Ltd., followed by the company's media segment, with its crown jewel, TVA Group. Finally, its smallest segment is sports and entertainment.
The company has an attractive investment thesis for investors with a longer-term investment horizon. Here are some factors to consider:
- Industry leadership. Videotron is the largest cable operator in Quebec and the third largest cable operator in Canada.
- Solid fundamentals. Third-quarter revenue, earnings before interest, taxes, depreciation and amortization (EBITDA), and earnings per share (EPS) were all ahead of the Street’s expectations. Revenue was up 9.5 per cent year-over-year. Management sees opportunities to continue to increase its average monthly revenue per user. The company will be reporting fourth-quarter results on March 9. The consensus EPS estimate is 49 cents.
- A focus on deleveraging its balance sheet. The company’s solid free cash flow generation can be used to reduce its debt, strengthen its balance sheet and repurchase more shares until it has full ownership of Quebecor Media Inc. At the end of the third-quarter, the company’s net debt-to-EBITDA ratio climbed to 3.6 times up from 3.1 times at the end of the third quarter in 2014 after the company increased its ownership in Quebecor Media to 81 per cent from 75 per cent.
- Potential catalyst: National Hockey League franchise. The company filed an application to the NHL for the consideration of a Quebec City team. Last year, construction of the Videotron Centre was completed. The newly opened arena holds more than 18,000 people. An NHL franchise would translate into higher revenue for Quebecor.
- Potential catalyst: Ownership of Quebecor Media. Management remains committed to ultimately owning all of the shares of Quebecor Media Inc., which could eliminate its holding company valuation discount and raise analysts’ target prices.
- Potential catalyst: Selling its unused spectrum assets. On the third-quarter conference call, Pierre Dion, the president and CEO, stated that, “Selling is now one option that is on the table.” A sale could unlock shareholder value.
- Leadership. Former prime minister Brian Mulroney is chairman of the board of Quebecor and Quebecor Media.
Dividend policy
Quebecor pays shareholders a quarterly dividend of 3.5 cents a share, or 14 cents a year, equating to an annualized dividend yield of less than half a per cent.
Valuation
Looking at the company's valuation using a net asset value approach can result a wide range of target prices, depending on discretionary variables such as the applied enterprise-value-to-EBITDA multiples, holding-company discount rate, and EBITDA forecasts. Consequently, analysts' target prices for Quebecor range from a low of $33 to a high of $44. The average one-year price target is $39.83, implying the shares will realize a double-digit return over the next year.
Analysts' recommendations
According to recent Bloomberg data, there are 14 analysts with buy recommendations.
The consensus EBITDA forecast is $1.4-billion in 2015, anticipated to rise to $1.5-billion in 2016 and $1.6-billion in 2017. The Street's EPS forecast is $1.93 in 2015, rising 16 per cent to $2.23 in 2016, and then expected to jump 22 per cent to $2.73 in 2017.
Chart watch
Over the past several months, the stock has been consolidating largely in the $32.50 to $35.70 range.
There is large overhead resistance around $36.
There is downside support around $31.50, near its 200-day moving average.
The relative strength index is at 54, suggesting the stock is in technically neutral territory, neither overbought nor oversold.
The bottom line
The stock is a buy for relatively defensive, patient investors with modest return expectations.
I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.
The author does not personally own shares in the security mentioned in this story.
