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Move over, BCE and Rogers. Investors have a new telecom favourite

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The Federal Court of Appeal’s approval this week of Rogers Communications Inc.’s RCI-B-T takeover of Shaw Communications Inc. SJR-B-T should be bad news for Telus Corp. T-T, the company most strongly opposed to the $20-billion deal.

So why is Telus the best-performing telecom stock so far this year?

The share price of the Vancouver-based company is up 8.7 per cent in 2023. That’s well ahead of Rogers, which is up about 2 per cent, even though the Toronto-based company stands to gain from expanding its national footprint when it adds Shaw’s network, assuming the deal closes.

Telus is also ahead of Shaw, which is up 1.7 per cent this year but still below its takeover price of $40.50 a share. And Telus is leading Quebecor Inc. QBR-B-T, whose Videotron subsidiary will buy Shaw’s Freedom Mobile wireless business after the Rogers-Shaw deal closes.

Telus has also gained more than BCE Inc. BCE-T, a popular stock because of its telecom-industry-leading 5.9 per cent dividend yield. BCE shares are up 4.8 per cent in 2023.

Admittedly, four weeks is a short period of time to measure share price performance. Stock returns look different when the time horizon is stretched to three months or one year, given that Telus has fallen behind some of its peers over some longer periods.

Yet January’s upbeat returns suggest that investors may be looking beyond the Rogers-Shaw deal as a pivotal event within the Canadian telecom sector. Perhaps they see other factors giving Telus a boost, even as the deal – which still requires final approval from the federal Industry Minister – threatens to raise the competitive pressure on the company’s home turf in Western Canada.

Enthusiastic investors may be onto something here. Mutual fund managers are overwhelmingly in favour of Telus relative to other telecom stocks, based on CIBC Capital Markets data showing that institutional investors have significantly overweighted the stock relative to its weighting within the S&P/TSX 60 Index.

As well, CIBC Capital Markets analyst Stephanie Price this month upgraded Telus to “outperformer” from “neutral” – the equivalent of moving to a “buy” recommendation from “hold” – based on what she believes is a discounted valuation for the stock.

And RBC Dominion Securities analyst Drew McReynolds recently singled out Telus as his top Canadian telecom stock pick. This week’s ruling from the Federal Court of Appeal, which he believes is good news for Rogers, Shaw and Quebecor, didn’t changed that view.

In his outlook for the telecom sector – released earlier this month and based on the assumption that the Rogers-Shaw deal will be approved – Mr. McReynolds said that Telus was his only “outperform” recommendation in the sector.

His reasoning: The telecom sector could struggle with stock valuations that are hardly cheap, given high price-to-earnings ratios. The sector is also vulnerable to a recession, which could weigh on profit growth.

He expects Rogers’s share price will rise to $69 within 12 months, but that’s just 6 per cent above its current price. His target price for BCE is $63, which is less than 2 per cent above the current price and suggests investors will be collecting little more than dividends over the next year.

However, Telus stands out from its peers with a target price of $34, which implies a gain of nearly 20 per cent.

According to Mr. McReynolds, Telus is compelling for a couple of key reasons.

It has largely completed the expensive work of installing fibre-optic cable to homes and businesses, which means that the company’s capital expenditures will likely fall 31 per cent this year from last year. That will drive free cash flow to $2.7-billion, or well more than double the estimate of $1.1-billion in 2022, which is money that can be used to pay down debt.

As well, he expects that Telus will see its EBITDA (earnings before interest, taxes, depreciation and amortization, which is a measure of profitability) rise by a peer-leading 10.4 per cent in 2023.

That’s twice the pace of what Mr. McReynolds expects from Rogers, and is partly based on Telus continuing to grab significant internet market share and reporting strong growth in its non-telecom health technology and agribusiness divisions.

No doubt, there could be volatility ahead for Canadian telecom stocks as investors weigh high interest rates against a looming economic downturn, and Telus isn’t immune to shifting conditions. But if January is any indication, the Rogers-Shaw deal may be old news as investors focus on a new favourite.

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Netflix’s subscriber growth slows as gains from password-sharing crackdown subside

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Netflix on Thursday reported that its subscriber growth slowed dramatically during the summer, a sign the huge gains from the video-streaming service’s crackdown on freeloading viewers is tapering off.

The 5.1 million subscribers that Netflix added during the July-September period represented a 42% decline from the total gained during the same time last year. Even so, the company’s revenue and profit rose at a faster pace than analysts had projected, according to FactSet Research.

Netflix ended September with 282.7 million worldwide subscribers — far more than any other streaming service.

The Los Gatos, California, company earned $2.36 billion, or $5.40 per share, a 41% increase from the same time last year. Revenue climbed 15% from a year ago to $9.82 billion. Netflix management predicted the company’s revenue will rise at the same 15% year-over-year pace during the October-December period, slightly than better than analysts have been expecting.

The strong financial performance in the past quarter coupled with the upbeat forecast eclipsed any worries about slowing subscriber growth. Netflix’s stock price surged nearly 4% in extended trading after the numbers came out, building upon a more than 40% increase in the company’s shares so far this year.

The past quarter’s subscriber gains were the lowest posted in any three-month period since the beginning of last year. That drop-off indicates Netflix is shifting to a new phase after reaping the benefits from a ban on the once-rampant practice of sharing account passwords that enabled an estimated 100 million people watch its popular service without paying for it.

The crackdown, triggered by a rare loss of subscribers coming out of the pandemic in 2022, helped Netflix add 57 million subscribers from June 2022 through this June — an average of more than 7 million per quarter, while many of its industry rivals have been struggling as households curbed their discretionary spending.

Netflix’s gains also were propelled by a low-priced version of its service that included commercials for the first time in its history. The company still is only getting a small fraction of its revenue from the 2-year-old advertising push, but Netflix is intensifying its focus on that segment of its business to help boost its profits.

In a letter to shareholder, Netflix reiterated previous cautionary notes about its expansion into advertising, though the low-priced option including commercials has become its fastest growing segment.

“We have much more work to do improving our offering for advertisers, which will be a priority over the next few years,” Netflix management wrote in the letter.

As part of its evolution, Netflix has been increasingly supplementing its lineup of scripted TV series and movies with live programming, such as a Labor Day spectacle featuring renowned glutton Joey Chestnut setting a world record for gorging on hot dogs in a showdown with his longtime nemesis Takeru Kobayashi.

Netflix will be trying to attract more viewer during the current quarter with a Nov. 15 fight pitting former heavyweight champion Mike Tyson against Jake Paul, a YouTube sensation turned boxer, and two National Football League games on Christmas Day.

The Canadian Press. All rights reserved.

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All Magic Spells (TM) : Top Converting Magic Spell eCommerce Store

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CPC Practice Exam

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