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Canadian telecom stocks poised for bounceback as price battle abates

Aravinda Galappatthige, managing director and institutional equity researcher at Canaccord Genuity, joins BNN Bloomberg to discuss the outlook of Canadian telcos.

(Bloomberg) -- Canada’s biggest telecommunication stocks have fallen to multi-year lows as competitive wireless strategies failed to impress investors. A number of analysts say the rout is presenting a good buying opportunity.

The S&P/TSX Composite’s communications index has been the worst group performer in the broader index so far this year, posting a loss of nearly 16 per cent since early January. The index is made up of heavyweight telco names like Rogers Communications Inc. and Telus Corp., whose stocks trade near their 2016 levels, as well as BCE Inc., whose shares hover around their lowest point since 2013.

One reason for the slump: The companies’ wireless strategies “aren’t doing right by investors” as they try to beat on price after Rogers closed its deal with Shaw Communications Inc. and Quebecor Inc. acquired Freedom Mobile Inc., said Adam Shine, financial markets analyst at National Bank of Canada, in a recent note to investors.

This “promotional intensity” is weighing on growth and share prices, Shine said. Shares of BCE have slipped over 30 per cent, Telus’ stock is down 23 per cent and Rogers shares have declined 20 per cent since the latter closed its Shaw deal in April 2023.

The slump however presents an investment opportunity, said Drew McReynolds, an analyst at RBC Capital Markets. “Given the recent heavy underperformance of the sector, we believe the stocks are poised for a bounce,” McReynolds said.

The companies start reporting second-quarter results in late July, and investors will be looking for a clearer picture on sustained revenue growth of around three per cent, which can only come from more stable pricing, McReynolds said. Rogers will be the first one to report on July 24, before the market opens.

Analysts at Canaccord Genuity are also betting on a recovery. Aravinda Galappatthige in a recent note said his team is “constructive” if the companies manage costs and pursue a broad-based digital transformation. Canaccord holds buy ratings for BCE, Rogers, Telus and Quebecor. Galappatthige still flagged similar concerns around promotional activity as his peers and cut his price targets for BCE, Rogers and Telus on Tuesday.

These concerns arose after the Canadian telecoms space became a market with four national wireless companies when Quebecor went from being a small regional player to a more prominent contender. This happened through the forced sale of Freedom Mobile to the Montreal-based wireless carrier’s business unit Videotron. Rogers and Shaw came to an agreement to sell the Freedom asset to meet regulatory approval for their own deal. The ensuing competitive landscape shuffle triggered a price war among the carriers that dug into margins.

Still, there are some “green shoots” in wireless pricing trends in July that provide an encouraging sign, said Toronto-Dominion Bank analyst Vince Valentini, pointing to recent price increases at Bell and Telus. Both providers raised their offer for their cheapest main brand to $65 a month, from $60.

BNN Bloomberg is owned by Bell Media, which is a division of BCE.

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