A Tight-Fisted Wireless Player

12/03/2008 10:00 am EST

Focus: STOCKS

Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, says a Canadian wireless provider is growing nicely while watching its cash.

Telus (NYSE: TU) is the largest telecom company in Western Canada. It owns two wireless networks. One is a CDMA network, similar to the kinds of networks operated by Sprint and Verizon in the US, and the other is a mobile radio system.

The company is also the fourth largest Internet provider in Canada with just over one million high-speed subscribers, [and it] got into the TV business in 2005 when it introduced Telus TV.

Under chief executive officer Darren Entwistle, Telus is also building high-speed wireless—but without incurring massive costs. The company announced in October that it would build its third-generation (3G) network together with Bell Canada to save costs. The cost of the buildout—which is expected to run about $1 billion—will be split evenly.

Telus is also preparing for the next generation of wireless. The company participated in the last wireless spectrum auction, bidding $880 million (Canadian) for an average of 16.2 MHz that the company plans to use for 4G.

Good financial management also makes a big difference. Telus's chief financial officer Bob McFarlane is known for seizing financing opportunities when capital markets are favorable. For example, last March, McFarlane prematurely extended Telus's $1.7-billion (Canadian) credit line that was to come due next spring all the way to March 2013, locking in a better rate than would be available today.

[Meanwhile,] Telus has an investment-grade credit rating, a conservative 1.8x net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio, and no major debt maturities until 2011. It's also got enough surplus cash to buy back shares, and the company could use those funds for other purposes, if necessary.

Telus reported third-quarter revenue of $2.4 billion, a 6% increase from a year ago. Wireless revenue grew 9% based on record year-to-date subscriber growth, while wireline revenue grew 4%, driven by data growth. Net income in the quarter was $285 million, and earnings were 89 cents per share, [both down about] 30% from 2007.

Telus now expects full-year revenue of $9.675 billion to $9.725 billion, down very slightly from a previous target. It forecast basic earnings per share of $3.45 to $3.60, down from a previous range of $3.50 to $3.70.

While the stock is down about 40% this year, it has $36 million in cash—about double what it had last year—and just $6 million in debt. The company trades at 8.79x earnings—about the same as BCE (NYSE: BCE), but its operating margins are 22%, compared with 19% for BCE.

Once the economy stabilizes, I think Telus stands to do very well. I recommend purchase of TU shares at current levels. (They closed below $28 Tuesday—Editor.) My 12-month target price is $37.

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