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Balanced View on BCE

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On Dec 19, we maintained our Neutral recommendation on Canadian telecom major BCE Inc. (BCE - Free Report) . We believe management’s six strategic initiatives will deliver stable profits in the coming quarters. However, acquisition costs from the Astral takeover might impede margin growth. The leading telecom operator holds a Zacks Rank #4 (Sell).

Why Maintained?

The company’s investment in broadband network and services, accelerating wireless services, leveraging wireline momentum, expanding media coverage, improving customer service and competitive cost structure will help the company to tap new customers and enhance revenues.

The acquisition of Astral operations has raised revenue expectation by 2% to 4% for 2013. Astral has already started to deliver meaningful performance and is expected to be fully accretive over the next year supporting earnings and free cash flow growth at Bell Media. Acceleration in Fibe TV and Fibe-based Internet growth will be accretive to the company’s wireline sector.

Substantial investments in network coverage, customer retention, lucrative data plans, launch of new handsets as well as offering of net protection are expected to be beneficial to the company’s wireless segment. The company expects to see higher ARPU (average revenue per user) from a favorable geographic and customer segment mix, accelerating smartphone activation and expansion of its 4G Long-Term Evolution (LTE) networks.

Moving forward, the company expects cash severance and other acquisition costs associated with the Astral acquisition. Further, the long-term debt associated with the acquisition of Astral could increase the interest expenses of the company. As a result, the company projected that the acquisition provides the company with limited scope to fortify its free cash flow position until 2014.

The company’s local line access for traditional telephony service continues to decline due to wireless substitution and higher competition. This is reflected by persistent erosion in overall network access services on an annualized basis, hurting revenues and EBITDA of local and long-distance operations.

Competition could increase for BCE moving forward as the French telecom giant is considering entry into Canada’s wireless market. These risks force us to remain cautious on the stock.
Other Stocks

Better-ranked companies within the telecommunication sector include Hawaiian Telcom Holdco Inc. , Chungwa Telecom Company Ltd and Level 3 Communications Inc. . HCOM carries a Zacks Rank #1 (Strong Buy) while CHT and LVLT stocks currently carry a Zacks Rank #2 (Buy).

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