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Key Takeaways for Telus Stock:
- We see Telus as over 25% undervalued, and with a low uncertainty rating while pursuing avenues with high growth potential – a combination of attributes hard to find elsewhere in the communications sector.
- Telus doesn’t have low- or negative-growth legacy businesses to wind down and dilute overall growth levels to the extent that other Canadian Telcos do.
- Telus has already replaced most of its copper network with fibre, significantly improving quality, taking market share from Shaw and increasing future cash flow to fund high-growth potential businesses.
Andrew Willis: We’ve seen Telus stock (T) as undervalued for a while now. The company has had its low points, like layoffs last year, but as we’ve seen lately, the Canadian communications sector is already prone to sending confusing signals.
From epic service outages to tensions with regulators, investors have had a tough time tuning into what matters most for long-term growth among Canadian telco stocks. Sure, if you were to focus on the bottom line, you’d find that Telus was leading the communications space in Canada in terms of recent results. They had the best revenue and earnings [EBITDA] growth last quarter and added the most internet and wireless customers. But even those great results can be distracting.
Investors might be missing out on distinguishing factors on the downside among Canadian telco stocks. Telus has fewer headwinds when it comes to wrapping up legacy businesses. Its growth isn’t offset by a large wireline telephone business that it needs to wind down, and it has no legacy television customers to transition. And investors in the Canadian telecom space may be missing out on opportunities outside of the sector.
Telus Has High Growth Potential Other Telcos Don’t
Unlike its peers, Telus has also made substantial investments in businesses that are not typically related to telecom, according to senior equity analyst Matthew Dolgin. Businesses like Telus International, Telus Health and agricultural services have high upside potential, and we project growth rates in the double-digits through to 2028.
With Telus tapping into alternative revenue sources with higher return potential, there will be higher risks and a potential drag on margin. Meanwhile, with the bulk of capital spending complete for Telus, the company’s free cash flow should rise significantly in the coming years – and just might be able to afford risker bets - so Telus can become more than a Telco.
For Morningstar, I’m Andrew Willis.
Telus Bulls Say
- With its buildout of a fiber fixed-line network, Telus' 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 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.
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