We remain on the sidelines on Telus Corporation’s (TU - Analyst Report) owing to the continued decline in access line, an increasingly competitive domestic wireless market and reduced wireless data plans.
The second largest Canadian telecommunications company faces fierce wireless competition from Rogers Communication (RCI - Analyst Report) and BCE Inc. (BCE - Analyst Report). The entry of cable TV operators such as Shaw Communications into the wireline market has intensified competition further. Additionally, we believe the reduction in roaming call rates will lower the company’s data revenues going forward.
In the recently concluded second quarter, earnings per share missed the Zacks Consensus Estimate but was above the year-ago earnings. The improved year-over-year growth were driven by continued wireless subscriber growth, accelerated wireless data services, increased smartphone sales and growing wireline networks. These positive attributes also raise optimism on Telus’ 2011 results.
The company expects consolidated revenue and EBITDA to increase 4% to 6% and 1% to 6%, respectively, from 2010 levels. Earnings per share are expected to grow in the range of 7% to 19% on improved operating profits and a significant reduction in both taxes and financing costs.
We remain encouraged by Telus’ prospects in wireless data growth given new devices, technology upgrades, strong adoption of smartphones, deployment of HSPA+ Dual Cell technology and the expected launch of the 4G+ LTE network in 2012, which are expected to fuel wireless revenue growth. But the potential roll-out of the 4G+ LTE wireless service in rural Canada depends on the ability to acquire the 700 MHz band from the expected auction in 2012 or 2013.
In the Wireline business, Telus’ continued investments to widen the footprint of its fiber optic network i.e. Optik TV and High Speed Internet services across British Columbia, Alberta, and Eastern Quebec will boost profitability.
Moreover, the company remains committed to deliver attractive returns to shareholders in the form of higher dividend payouts. Additionally, over the long term, the company’s balance sheet is expected to be sound as it is develeraging its balance sheet.
Consequently, we are maintaining our long-term Neutral recommendation on Telus supported by the Zacks #3 Rank (Hold).