Canadian Telecom Stocks: There is Blood in the Street

It has been a rough week for Canada’s Big 3 telecoms. First, the Federal election results all but guarantees that Canada’s telecoms will be under pressure to lower wireless pricing. It was a focal point of both the Liberal and NDP platforms. Combined, they have the votes to move on making good on their campaign promises to lower prices.  

This is a macro event, and at this point in time there is no clear way to know exactly how this will play out. Can the Feds deliver on this promise? How will it impact the Big 3? There is no clarity here, and don’t expect answers any time soon.  

Outside of the elections, the biggest setback came courtesy of Rogers Communications’ (TSX:RCI.B) disappointing third quarter results. Earnings of $1.19 per share missed by $0.12 and revenue of $3.75 billion missed by $120 million.  

Unlimited data plans hurting Rogers Communications (TSE:RCI.B)

At the centre of Rogers issues was the unintended consequences of its unlimited wireless plans. The shift led to a decreased in overage charges – a typically lucrative revenue stream.  More than one million Canadians signed up under the new pricing model which led to a $50 million reduction in overage fees.   

In 2017, Canadians paid $1.2 billion in overage fees – that is a big revenue stream for telecom companies. 

It is a new reality that Canada’s big 3 must operate within. Customers are demanding better plans at lower prices. The Government has taken notice, and the expectation is that unlimited data plans will become the norm.  

As a result of the shift, Rogers also reduced its revenue forecast for 2019. It now expects flat growth (0%) at the mid-range, down from 4% previously. It was therefore not surprising that its stock price has dropped by 8% since releasing Q3 earnings.  

BCE (TSX:BCE) and Telus (TSX:T) felt the pain as well

BCE inc (TSX:BCE) and Telus (TSX:T) were not immune, and were also dragged down by Rogers’ third quarter performance. BCE has since lost 5% its value, while Telus’ stock was trimmed by 4%.  

It is at trend worth monitoring. BCE is scheduled to report next week while Telus isn’t due to report earnings until November 8th 

According to Scotia Capital telecom analyst Jeff Fan 

“Wireless results are likely to get worse before they get better, and consensus expectations have to be reset”. 

Does this mean investors should abandon the sector? Absolutely not. The big three own the space, pay a juicy dividend and they will still grow, albeit at a slower pace.  

If you are looking to enter the sector, it may be a little volatile over the next few weeks so be cautious with any investment. It is recommended that you average into your position as there may be more downside ahead.