Key Takeaways for Telus Stock:
- Revenue cuts and layoffs at Telus took headlines, but the company’s balance sheet is sound
- Broad and varying business lines can contribute to quarterly losses
- Investors should focus on long-term opportunities, like the company’s wireline business
Andrew Willis: Just a few months ago, we were talking about how Telus was defying gravity in the Canadian telecom industry. But now there are headlines around layoffs at Telus (T). What happened?
Until recently, we’ve been praising Telus for its ability to generate increased revenue per user, while the average cost of cell service to Canadians dropped 30%. Not to mention the completion of a modern fibre optic network that’s likely to be their best business. And then Telus goes ahead and reduces headcount and revenue projections for the year. Should investors be surprised?
Apparently not. We didn’t see a decline in Telus stock price on the news – and we suspect that’s because investors expected it and put it in perspective.
Not all Telecom Trends are Equal for Telus Stock
There are quite a few different lines of business at Telus, with different growth rates and technological challenges to consider. From mobile phone lines to television and internet service, investors should keep in mind that performance will be uneven as services and consumer demands evolve. For Telus, that may mean their best year for mobile phone service additions since 2010, while growth is much more consistent in the broadband internet and TV market. And for emerging side businesses like Telus International, it may mean a loss.
This quarter, it was costs and a reduction in headcount of 6,000 employees, or 5% of the company’s total, that took the spotlight in the media. But in the background, investors had already taken 20% out of Telus stock this year, equity analyst Matthew Dolgin notes, adding that sellers of this communications stock have gone too far – even if they beat the bad news.
For Morningstar, I’m Andrew Willis.
Telus Stock Bulls Say
- With the buildout of FTTH, Telus' wireline network quality has eclipsed that of primary competitor Shaw over much of its footprint. This should propel continued strength in wireline pricing, margins, and share gains.
- The Canadian government’s goal of significantly increasing immigration should prompt high levels of subscriber growth for all wireless incumbents, and Telus is second to none.
- Telus’ free cash generation should rise significantly and stay elevated as it has now passed the bulk of the capital spending associated with its fiber network overhaul.
Telus Stock Bears Say
- A combined Quebecor and Freedom Mobile should make for Canada’s strongest-ever fourth national wireless competitor, and it will undercut the Big Three on price, limiting pricing power and pressuring margins.
- Regulators' preference for competition and presence in the industry will keep a lid on incumbents' profits and business potential.
- Telus' aggressive pursuit of nascent, noncore businesses for high valuations bring higher risks than typically associated with telecom stability, albeit with more potential upside.
Editor's Note: All images are courtesy unsplash.com and APImages.
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