Pat Dorsey’s informative book, "The Little Book That Builds Wealth," highlights that most companies with economic moats from Morningstar coverage universe are in the media sector. Rogers Communications Inc. (RCI, Financial) is a diversified communications and media company in Canada. The company has been widening its moat over the last six years that I have been following it. Rogers is also majority controlled by the family of Ted Rogers. I think the recent 16% correction in Rogers (RCI) presents a good opportunity to start a position in a media company with strong growth prospects which is trading at a reasonable valuation.
I) The Record
Rogers (RCI) business has performed exceptionally well over the last 5 years which includes the great global recession of 2008/2009. EPS increased from $1.99 in 2008 to $3.43 in 2012. Dividend has increased from $1.00 in 2008 to $1.74 in 2012. Over the last 10 years (2002-2012) RCI has returned 654% compared to 99% return for SPY.
II) Business and History
Below is a brief history and timeline of Rogers as per the company website:
Rogers (RCI) was started in Canada by Ted Rogers in 1960 while in law school when he bought CHFI, a struggling FM radio station and built it into a successful enterprise. Ted Rogers founded Rogers Cable TV in 1967 by acquiring Bramalea Telecable. In 1989 Rogers sells U.S. cable assets for over $1 billion profit and invests profits in the wireless sector. In 1995 Rogers becomes the first cable company in North America to launch commercial high-speed Internet service when it launches service in Newmarket, Ontario. In 1999 Microsoft, AT&T and British Telecom invest in Rogers. In 2000 Rogers acquires the Toronto Blue Jays major league baseball team. In 2001 Rogers Media acquires control of Sportsnet from CTV and renames it Rogers Sportsnet. In 2001 Rogers Cable launches High Definition Television (HDTV) in Canada and in 2002 Rogers launches GSM wireless network. In 2002 Rogers Cable launches Video On Demand which was renamed as Rogers On Demand in December 2003. In 2004 Rogers acquires the SkyDome stadium in Toronto. Also in 2004 Rogers buys back AT&T's interest in Rogers Wireless for $1.8 billion. In 2008 Rogers Wireless launches the Apple iPhone. After Ted Rogers passes away in 2008 Nadir Mohamed becomes President and CEO of Rogers in 2009. In 2012. Rogers completes purchase of 37.5% stake in Maple Leaf Sports and Entertainment the company that owns the Toronto Maple Leafs, Raptors, Marlies and Toronto FC as well as real estate and television properties.
III) Operations and Competitive Advantages
As per company website:
“Rogers Communications Inc. is a diversified Canadian communications and media company engaged in the telecom and media businesses. Rogers Wireless is Canada's largest wireless voice and data communications services provider and the country's only national carrier operating on the combined world standard GSM/HSPA+/LTE technology platforms. Rogers Cable is a leading Canadian cable services provider, offering cable television, high-speed Internet access, and telephony products, and together with Rogers Business Solutions, provides business telecom, data networking and IP solutions to small, medium and large enterprise, government and carrier customers. Rogers Media is Canada's premier group of category-leading broadcast, specialty, print and online media assets, with businesses in radio and television broadcasting, televised shopping, sports entertainment, magazine and trade journal publishing and digital media.”
Majority of Rogers revenue (58%) and profits (63%) come from the wireless segment. Rogers wireless has an ARPU of $60 in 2012. Rogers continues to invest in its wireless infrastrucure and remains focussed on innovation to retain its lead in the wireless segment in Canada. Rogers has 9.5 million Canadian wireless subscribers. This accounts of 27.5% of Canadian population of 34.5 million. The Cable and Business segment represents 29% of revenue and 34% of profits. Out of 9.5 million households in Canada Rogers has 2.2 million cable television subscribers and 1.86 million high speed internet subscribers. Media and Entertainment segment accounts for 13% of revenue and a small 3% of profits.
Competitive Advantages
These are some of the competitive advantages:
1. Rogers has an oligopoly (with regional monopoly in Ontario) in the Canadian wireless, cable and media industry. Rogers competes with Bell and Telus in the wireless segment in Canada. Rogers competes with Bell (BCE, Financial), Telus (TU), Shaw (SJR), Cogeco (CGEAF) and other providers in the cable television and internet. Rogers counts almost 30% of Canadian population as customers.
2. The wireless and cable business has large amount of up-front costs and ongoing fixed costs. This makes it very hard for any new incumbents to succeed. Mobilicity and Public Mobile launched in Canada in 2008 but are on their way to becoming bankrupt in the near future.
3. Rogers offers its customers bundled service discounts and wireless and cable device upgrade discounts which increase customer retention.
4. Rogers has the best wireless network in Canada which is a 4G LTE Network which covers 60% of Canada. This is a major advantage.
5. Rogers owns sports teams and sports content and other entertainment assets. Sports content helps increase customer loyalty and is a major plus.
6. Rogers has well diversified operations and is majority owned by family of founder Ted Rogers and this allows the company to focus on the long term growth of the business.
IV) Balance Sheet and Profitability
Below is some information taken from the 2012 Annual Report and 2013 AGM Presentation. Rogers currently has approximate debt of $10.5 billion and debt/equity of 2.6. Rogers in 2012 had revenue of $12.5 billion and operating earnings of $4.8 billion and EPS of $3.43. Over the last five years EPS has grown at a rate of 15% per year. This includes the worst recession in recent memory during 2008 to 2009. Pre-tax free cash flow in 2012 was a strong $2.0 billion which was $3.88/Share.
V) Management
Ted Rogers the founder ran Rogers from 1960 until his passing in 2008 and created exceptional value for shareholders over five decades. Mr. Nadir Mohamed took over and serves as the chief executive officer of Rogers. He started as chief executive officer in 2009 and has done an excellent job reducing expenses, keeping debt in check and increasing wireless investments to grow market share and earnings. Nadir Mohamed plans to retire in January 2014. Three members of the Rogers family who own controlling stake in Rogers (majority of Class A voting shares) sit on the Rogers Board and an international search for a new CEO is ongoing.
VI) Value and Price
Rogers (RCI) is currently trading in the $43 to $44 range as of June 13. Below is some information about 2013 guidance from company 2013 AGM Presentation.
I believe this price is below the intrinsic value of the company when considering the growth prospects and competitive advantages. Rogers is expected to grow revenue by 3% to 5% and plans to repurchase 2% or more of shares via a $500 million share buyback. It is highly like that Rogers may be able to grow EPS by 8% to 10% in 2013 to $3.7 to $3.8. Rogers is trading at forward P/E of 11.5 which is a significant discount to peers in North America. Rogers has diversified operations and strong competitive advantages and there is a high likelihood of consolidation in Canadian Telecom sector in late 2013 and 2014 despite the concerns of the Canadian government.
Mritik Capital suggests that investors seeking 10% total return per year over next five years can purchase Rogers at prices below $42 on a dip. This would provide entry at 4.1% yield and forward P/E of 11. Investors looking for higher return can sell $45 January 2014 puts in excess of $6 on a price dip and either get assigned at prices below $40 or earn an annual return in excess of 22% per year.
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VII) Catalysts
I believe the following will act as catalysts over the next three to five years:
1. RCI will continue to execute on its strategy of focussing on retaining the existing customers and increasing ARPU at a rate above inflation. This will grow the per share intrinsic value.
2. New entrants to Canada’s wireless market in 2008 are looking at going bankrupt over the next 12 months and they will be eligible to sell their spectrum to incumbents when the five year lockup expires in November 2013. There is high likelihood of a wave of consolidation in the Canadian Telecom market.
3. Canada has 80% penetration rate in wireless customers which is one of the least penetration rates in the developed world. This allows for continued growth for Rogers over next three to five years.
4. Continued innovation from Rogers in mobile payments, wireless video anywhere and targeted acquisitions in sports and media can add value.
VIII) Specific Risk
As in any investment there are risks associated with an investment in RCI. Following are some of the risks:
1. Digital media competition including Netflix could prove to be more significant than anticipated. Rogers is investing to stay ahead of the curve and its bundled service offerings is a major advantage.
2. Canadian government could impose more regulatory restrictions that could impede Roger’s growth. Given that Canada is opposed to foreign entrants this is unlikely to have a significant impact on Rogers.
3. A sharp increase in interest rates could increase Rogers cost of capital significantly and weight on profits.
4. U.S. and non-Canadian investors need to consider the foreign exchange risk (Current CADUAS = 0.98). Canada is a developed nation with a rich resource base and well educated work force and has good economic prospects in the long term. However a near term downturn in Canadian Housing and resource sectors could weigh on the Canadian Dollar.
5. Rogers has dual voting stock with members of family of Ted Rogers holding majority of the Rogers Class A voting stock. This is something to consider for investors in non voting Class B stock.
IX) Why Is This Cheap?
I believe Rogers (RCI) is currently undervalued when considering its rich history of value creation and strong growth prospects. On a relative valuation basis compared to US peers like Verizon (VZ, Financial) and AT&T (T, Financial) as well the company seems undervalued. The market is undervaluing RCI for the following reasons:
1. The actions of the Canadian government over the last month have brought down the valuations in the Canadian Telecom Sector incumbents Rogers, BCE and Telus.
2. The market is worried about the strong competition in the wireless segment which accounts for 63% of RCI profits.
3. The market is worried about emerging digital media competition.
4. Foreign investors may be selling RCI due to a possible near-term decline in the Canadian dollar.
5. RCI dual voting stock is a deterrent for many investors.
Disclosure
I own shares of RCI, BCE.
Comments and questions welcome.
Read more:
1. RCI 2012 Annual Report
2. Statistics Canada 2011 Census
3. BCE Investor Relations
4. Telus Investor Relations
5. Shaw Communications
Note:
I have used information from the RCI investor presentations and financial statements. I have referenced information from Yahoo Finance and Statistics Canada.
I) The Record
Rogers (RCI) business has performed exceptionally well over the last 5 years which includes the great global recession of 2008/2009. EPS increased from $1.99 in 2008 to $3.43 in 2012. Dividend has increased from $1.00 in 2008 to $1.74 in 2012. Over the last 10 years (2002-2012) RCI has returned 654% compared to 99% return for SPY.
II) Business and History
Below is a brief history and timeline of Rogers as per the company website:
Rogers (RCI) was started in Canada by Ted Rogers in 1960 while in law school when he bought CHFI, a struggling FM radio station and built it into a successful enterprise. Ted Rogers founded Rogers Cable TV in 1967 by acquiring Bramalea Telecable. In 1989 Rogers sells U.S. cable assets for over $1 billion profit and invests profits in the wireless sector. In 1995 Rogers becomes the first cable company in North America to launch commercial high-speed Internet service when it launches service in Newmarket, Ontario. In 1999 Microsoft, AT&T and British Telecom invest in Rogers. In 2000 Rogers acquires the Toronto Blue Jays major league baseball team. In 2001 Rogers Media acquires control of Sportsnet from CTV and renames it Rogers Sportsnet. In 2001 Rogers Cable launches High Definition Television (HDTV) in Canada and in 2002 Rogers launches GSM wireless network. In 2002 Rogers Cable launches Video On Demand which was renamed as Rogers On Demand in December 2003. In 2004 Rogers acquires the SkyDome stadium in Toronto. Also in 2004 Rogers buys back AT&T's interest in Rogers Wireless for $1.8 billion. In 2008 Rogers Wireless launches the Apple iPhone. After Ted Rogers passes away in 2008 Nadir Mohamed becomes President and CEO of Rogers in 2009. In 2012. Rogers completes purchase of 37.5% stake in Maple Leaf Sports and Entertainment the company that owns the Toronto Maple Leafs, Raptors, Marlies and Toronto FC as well as real estate and television properties.
III) Operations and Competitive Advantages
As per company website:
“Rogers Communications Inc. is a diversified Canadian communications and media company engaged in the telecom and media businesses. Rogers Wireless is Canada's largest wireless voice and data communications services provider and the country's only national carrier operating on the combined world standard GSM/HSPA+/LTE technology platforms. Rogers Cable is a leading Canadian cable services provider, offering cable television, high-speed Internet access, and telephony products, and together with Rogers Business Solutions, provides business telecom, data networking and IP solutions to small, medium and large enterprise, government and carrier customers. Rogers Media is Canada's premier group of category-leading broadcast, specialty, print and online media assets, with businesses in radio and television broadcasting, televised shopping, sports entertainment, magazine and trade journal publishing and digital media.”
Majority of Rogers revenue (58%) and profits (63%) come from the wireless segment. Rogers wireless has an ARPU of $60 in 2012. Rogers continues to invest in its wireless infrastrucure and remains focussed on innovation to retain its lead in the wireless segment in Canada. Rogers has 9.5 million Canadian wireless subscribers. This accounts of 27.5% of Canadian population of 34.5 million. The Cable and Business segment represents 29% of revenue and 34% of profits. Out of 9.5 million households in Canada Rogers has 2.2 million cable television subscribers and 1.86 million high speed internet subscribers. Media and Entertainment segment accounts for 13% of revenue and a small 3% of profits.
Competitive Advantages
These are some of the competitive advantages:
1. Rogers has an oligopoly (with regional monopoly in Ontario) in the Canadian wireless, cable and media industry. Rogers competes with Bell and Telus in the wireless segment in Canada. Rogers competes with Bell (BCE, Financial), Telus (TU), Shaw (SJR), Cogeco (CGEAF) and other providers in the cable television and internet. Rogers counts almost 30% of Canadian population as customers.
2. The wireless and cable business has large amount of up-front costs and ongoing fixed costs. This makes it very hard for any new incumbents to succeed. Mobilicity and Public Mobile launched in Canada in 2008 but are on their way to becoming bankrupt in the near future.
3. Rogers offers its customers bundled service discounts and wireless and cable device upgrade discounts which increase customer retention.
4. Rogers has the best wireless network in Canada which is a 4G LTE Network which covers 60% of Canada. This is a major advantage.
5. Rogers owns sports teams and sports content and other entertainment assets. Sports content helps increase customer loyalty and is a major plus.
6. Rogers has well diversified operations and is majority owned by family of founder Ted Rogers and this allows the company to focus on the long term growth of the business.
IV) Balance Sheet and Profitability
Below is some information taken from the 2012 Annual Report and 2013 AGM Presentation. Rogers currently has approximate debt of $10.5 billion and debt/equity of 2.6. Rogers in 2012 had revenue of $12.5 billion and operating earnings of $4.8 billion and EPS of $3.43. Over the last five years EPS has grown at a rate of 15% per year. This includes the worst recession in recent memory during 2008 to 2009. Pre-tax free cash flow in 2012 was a strong $2.0 billion which was $3.88/Share.
V) Management
Ted Rogers the founder ran Rogers from 1960 until his passing in 2008 and created exceptional value for shareholders over five decades. Mr. Nadir Mohamed took over and serves as the chief executive officer of Rogers. He started as chief executive officer in 2009 and has done an excellent job reducing expenses, keeping debt in check and increasing wireless investments to grow market share and earnings. Nadir Mohamed plans to retire in January 2014. Three members of the Rogers family who own controlling stake in Rogers (majority of Class A voting shares) sit on the Rogers Board and an international search for a new CEO is ongoing.
VI) Value and Price
Rogers (RCI) is currently trading in the $43 to $44 range as of June 13. Below is some information about 2013 guidance from company 2013 AGM Presentation.
I believe this price is below the intrinsic value of the company when considering the growth prospects and competitive advantages. Rogers is expected to grow revenue by 3% to 5% and plans to repurchase 2% or more of shares via a $500 million share buyback. It is highly like that Rogers may be able to grow EPS by 8% to 10% in 2013 to $3.7 to $3.8. Rogers is trading at forward P/E of 11.5 which is a significant discount to peers in North America. Rogers has diversified operations and strong competitive advantages and there is a high likelihood of consolidation in Canadian Telecom sector in late 2013 and 2014 despite the concerns of the Canadian government.
Mritik Capital suggests that investors seeking 10% total return per year over next five years can purchase Rogers at prices below $42 on a dip. This would provide entry at 4.1% yield and forward P/E of 11. Investors looking for higher return can sell $45 January 2014 puts in excess of $6 on a price dip and either get assigned at prices below $40 or earn an annual return in excess of 22% per year.
[/b][b]VII) Catalysts
I believe the following will act as catalysts over the next three to five years:
1. RCI will continue to execute on its strategy of focussing on retaining the existing customers and increasing ARPU at a rate above inflation. This will grow the per share intrinsic value.
2. New entrants to Canada’s wireless market in 2008 are looking at going bankrupt over the next 12 months and they will be eligible to sell their spectrum to incumbents when the five year lockup expires in November 2013. There is high likelihood of a wave of consolidation in the Canadian Telecom market.
3. Canada has 80% penetration rate in wireless customers which is one of the least penetration rates in the developed world. This allows for continued growth for Rogers over next three to five years.
4. Continued innovation from Rogers in mobile payments, wireless video anywhere and targeted acquisitions in sports and media can add value.
VIII) Specific Risk
As in any investment there are risks associated with an investment in RCI. Following are some of the risks:
1. Digital media competition including Netflix could prove to be more significant than anticipated. Rogers is investing to stay ahead of the curve and its bundled service offerings is a major advantage.
2. Canadian government could impose more regulatory restrictions that could impede Roger’s growth. Given that Canada is opposed to foreign entrants this is unlikely to have a significant impact on Rogers.
3. A sharp increase in interest rates could increase Rogers cost of capital significantly and weight on profits.
4. U.S. and non-Canadian investors need to consider the foreign exchange risk (Current CADUAS = 0.98). Canada is a developed nation with a rich resource base and well educated work force and has good economic prospects in the long term. However a near term downturn in Canadian Housing and resource sectors could weigh on the Canadian Dollar.
5. Rogers has dual voting stock with members of family of Ted Rogers holding majority of the Rogers Class A voting stock. This is something to consider for investors in non voting Class B stock.
IX) Why Is This Cheap?
I believe Rogers (RCI) is currently undervalued when considering its rich history of value creation and strong growth prospects. On a relative valuation basis compared to US peers like Verizon (VZ, Financial) and AT&T (T, Financial) as well the company seems undervalued. The market is undervaluing RCI for the following reasons:
1. The actions of the Canadian government over the last month have brought down the valuations in the Canadian Telecom Sector incumbents Rogers, BCE and Telus.
2. The market is worried about the strong competition in the wireless segment which accounts for 63% of RCI profits.
3. The market is worried about emerging digital media competition.
4. Foreign investors may be selling RCI due to a possible near-term decline in the Canadian dollar.
5. RCI dual voting stock is a deterrent for many investors.
Disclosure
I own shares of RCI, BCE.
Comments and questions welcome.
Read more:
1. RCI 2012 Annual Report
2. Statistics Canada 2011 Census
3. BCE Investor Relations
4. Telus Investor Relations
5. Shaw Communications
Note:
I have used information from the RCI investor presentations and financial statements. I have referenced information from Yahoo Finance and Statistics Canada.
