A Winning Cable Play From Canada

05/08/2007 12:00 am EST

Focus:

Tom Slee

Retired- Financial Advisor, Money Manager, Gordon Pape Enterprises LTD

Tom Slee of Internet Wealth Builder says Rogers Communications is a dominant Canadian cable and wireless provider that should continue to gain as customers sign up for the latest technology.

The cable companies came out of 2006 with their tails up and seem set to post double-digit earnings improvements this year and next. It’s all about new technology, market share and a bitter struggle between the traditional wire line providers and the cable operators. It’s a battle that the cable companies are winning, at least for the moment.

At this stage, all of the providers have several things going for them. Subscriber demand remains strong. We are in the age of communications and people are willing to pay for the latest improvements. Moreover, there are still a lot of untapped customers. As a result, there has been none of the deep discounting that wrecked the long-distance telephone business. Operating margins remain firm. Even capital expenditures are relatively modest.

Cable companies are already reporting significant earnings gains. Rogers Communications (TSX: RCI.B, NYSE: RG) in particular has the bit between its teeth.

This company, as we know it, was formed in 1962 when present CEO “Ted” Rogers acquired radio station CHFI in Toronto and developed an audience for FM broadcasting. Later he branched out into the emerging cable business and then, in 1985, launched into cellular telephones by forming Rogers Cantel. Nine years later, Mr. Rogers acquired MacLean Hunter. The Toronto Blue Jays and Rogers Centre (formerly SkyDome) were eventually added to the company’s sport media division.

Today Rogers is an aggressive Canadian blue chip poised for almost 20% earnings growth over the next year. With assets of $14 billion and annual revenues of about $9 billion, the company is Canada’s largest wireless provider with 6.2 million subscribers.

It’s also the country’s premier cable company with 2.3 million customers in Ontario and the eastern provinces, it is putting together a fourth conventional TV network, and it [owns] radio stations, two local television stations, and more than 70 consumer magazines and professional publications.

Fourth-quarter 2006 earnings were 27c a share, compared with a loss of 11c in 2005. Revenues jumped 14% year-over-year to $2.37 billion. For the year, Rogers made 97c a share versus a loss of 8c in 2005.  (All numbers used here are in Canadian dollars—Editor.)

All the major operating divisions exceeded expectations, with wireless leading the way. The more mature basic cable division is also still growing and 13,300 subscribers were added in 2006, compared to 9,200 the year before as packaging paid off. Internet demand remained strong.

Analysts expect the earnings momentum to carry on into 2007 and 2008. Moody’s Investors Service has just released a report predicting a 52% growth in the Canadian cable/digital telephone market over the next year. As a result, we should see earnings of about $1.15 a share in 2007, followed by as much as $1.60 in 2008. That’s remarkable growth during an economic slowdown.

Nevertheless, there are a couple of caveats. Trading at $44.13 (Canadian) with a multiple of 30.6x 12-months estimated earnings, the stock is not cheap. We also have to keep in mind that regulation remains a major player in the Canadian media industry.

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