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Competition darkens outlook for Rogers share price

An employee works inside a Rogers Wireless retail store in Vancouver, B.C..


Rogers Communications Inc. has led the way in the boom in wireless communications, but stronger competition along with rising expenses suggest the stock is nearing its peak in this market.

The company largely met the Street's expectations for the first quarter, but results contained several red flags that point to a rougher road ahead. Operating profit in wireless, the engine of growth, dipped 3 per cent; free cash flow decreased and capital costs rose.

"Trends are deteriorating," noted Dvai Ghose, of Canaccord Genuity Corp., listing numerous challenges ahead for Rogers. They include more pressure on wireless profitability, rising costs from upgrading its mobile network, new competition in cable and a bigger tax bill.

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Free cash flow declined almost 4 per cent year-over-year last quarter, a decrease Mr. Ghose attributed to an 8-per-cent increase in capital spending. Free cash flow could fall by as much as 25 per cent in 2012, as the company's taxes rise, he predicted in a research note. Mr. Ghose has a $36 price target on the stock and rates it "hold."

Growth in Rogers' cable unit will likely decrease as BCE Inc.'s Bell Canada rolls out its Internet-based TV service (IPTV) this year. Some analysts say investors are staying clear of the stock until they see what effect Bell's new TV service has on Rogers. In Western Canada, Telus Corp. is further ahead than Bell on its IPTV rollout, which has already hurt the region's cable incumbent, Shaw Communications Inc.

"We believe [Rogers]stock could trade in the doldrums for the next year or so, until wireless competition settles and/or the new entrants begin consolidating," noted Jonathan Allen, of RBC Dominion Securities Inc., who rates the shares "sector perform" and has a $40 target on them.

In some ways, Rogers is a victim of its own success. In wireless, it enjoyed the largest average revenue per user (ARPU) figures for years thanks to a better network than its rivals. But that advantage begin to fade when Bell and Telus caught up at the end of 2009 with a jointly built upgrade.

Since that point, Rogers has experienced the most severe declines of the three in ARPU for voice services and the weakest growth in data ARPU, and the pattern will likely continue, Mr. Ghose says. Now that it has lost its wireless advantage to Bell and Telus and faces fresh competition from new entrants to the market, Rogers will likely see profit margins fall and customer turnover increase, while the other incumbents benefit from the reverse, he added.

On Wednesday, Rogers said it will begin deployment of its next-generation wireless network this year, based on a technology called long-term evolution (LTE). But the announcement did not include any partners, which analysts say puts Rogers at a disadvantage to Bell and Telus, which have shared costs in the past.

Rogers continues to boast the best cash-flow yield, which should eventually lead to the best dividend growth of its group, noted Maher Yaghi, of Desjardins Securities. But the company's "high exposure to wireless remains a drag on both results and sentiment," he wrote in a report. Mr. Yaghi has a $41 price target on the stock and rates it "hold."

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