Falling profits, dashed expectations and withdrawn forward guidance might look like the perfect triple-whammy of bad news for a company’s investors. But when the source of the bad news is Rogers Communications Inc., investors might want to take a closer look at the opportunity instead.
The reason: Although the telecom giant is wrestling with the economic fallout from the novel coronavirus pandemic, it looks like a clear survivor – and the stock can still be bought at a substantial discount to its pre-pandemic levels.
The shares fell 1.5 per cent to $57.26 on Thursday. Though up 22 per cent from their lows in March, the shares are down about 20 per cent from their 52-week highs.
Admittedly, the 20-per-cent discount is hardly a surprise when you examine the near-term issues facing Rogers. The company reported its first-quarter financial results on Wednesday, for the three-month period ended March 31, and the snapshot wasn’t pretty.
Telecommunications is an essential service during the lockdown – working from home means you’re going to need access to a smartphone by day and Tiger King streaming by night – but the shuttered economy is still exerting some pressure.
As Rogers noted in its results, some financially stressed consumers are downsizing their wireless and cable packages. As a result, wireless service revenue fell 2 per cent, year over year. The impact for a full quarter under lockdown could be about 8 per cent, according to Maher Yaghi, an analyst at Desjardins Securities.
What’s more, Rogers faces the prospect of stressed consumers not paying their bills. Under normal conditions, bad debt comes to about $130-million a year – but the pandemic could saddle the company with as much as $250-million in additional bad debt, according to management.
And of course, Rogers is suffering from sports withdrawal: It owns the Toronto Blue Jays and has broadcast rights for National Hockey League games that aren’t being played, giving the company another hit that could take some time to heal if professional sports remain sidelined longer than most other businesses.
First-quarter revenue fell 5 per cent from last year’s first quarter and profit fell 10 per cent. Adjusted earnings fell short of analysts’ estimates and the company withdrew guidance for 2020, it said in a release, “given uncertainty associated with the impacts of COVID-19.”
But analysts aren’t particularly fussed about any of this because Rogers is in relatively strong financial shape and can weather the downturn – and this is where the buying opportunity comes in.
Rogers has $3.8-billion in available liquidity, including $1.9-billion in cash, giving it a powerful financial buffer. The company continues to generate strong free cash flow, which CIBC World Markets expects will remain relatively unchanged at nearly $2.3-billion in 2020.
Rogers also has the flexibility to cut back on expenses (fewer open stores, no cable to install on new homes) during the downturn. Mr. Yaghi calculated that Rogers has cut a total of $539-million from its capital expenditures since the coronavirus crisis began.
Meanwhile, the dividend, which yields 3.5 per cent, looks safe: The payout ratio is just 44 per cent of estimated 2020 free cash flow, compared with a payout ratio of 95 per cent for BCE Inc. and 81 per cent for Telus Corp.
“While the pandemic is having a material impact on the company’s operations, the bottom line is that over the long term this will not, in our view, detract from the value of the business,” Mr. Yaghi said in a note.
It’s a safe bet that the Blue Jays will eventually return to the field and that consumers will again turn to upsized cable and wireless packages. And when they do, Rogers could very well be a stronger company.
“Rogers is well positioned to bear the current crisis with only modest EBITDA [earnings before interest, taxes, depreciation and amortization] pressure, and demonstrate even better resilience on free cash flow level in the near term and come out of the crisis with a leaner cost structure poised for growth,” Robert Bek, an analyst at CIBC World Markets, said in a note.
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