Telus is still undervalued, say Echelon Wealth Partners

A “solid” quarter has Echelon Wealth Partners analyst Rob Goff feeling bullish about Telus (Telus Stock Quote, Chart, News: TSX:T).

On Friday, Telus reported its third quarter, 2016 results. The company earned $355-million on revenue of $3.2-billion, a topline that was up 2.6 per cent over the same period last year.

“Telus’s third quarter results reflect the company’s strong and disciplined performance across both our wireless and wireline operations,” said CEO Darren Entwistle. “Our team once again delivered industry-leading results in wireless customer loyalty, average revenue per user growth and lifetime revenue, as well as strong consolidated and segmented revenue and EBITDA growth. Importantly, these results are underpinned by a highly dedicated Telus team that is committed to consistently providing exceptional customer experiences.”

Goff says Telus’s revenue number was in-line with his expectations and wireless results that showed 87,000 net postpaid adds exceeded his expectation of 48,000. The analyst says there are two “primary pushbacks” on Telus: heightened competition from Shaw and the company’s Free Cash Flow payout. Goff is modeling a FCF payout of 166%/91% for 2016/2017 before declining to 79% for 2018, but notes that Entwistle communicated that the company expects to generate material FCF in 2018. Overall, he thinks there is upside in the stock.

“Beyond the near/mid-term competitive concerns, we continue to see TELUS shares as undervalued given the Company’s wireless driven growth profile, strong execution and shareholder commitment (7-10% annual dividend growth),” says Goff.

In a research update to clients today, Goff maintained his “Buy” rating and one-year price target of $46.00 on Telus, implying a return of 12.8 per cent at the time of publication.

The analyst believes Telus will generate Adjusted EBITDA of $4.59-billion on revenue of $12.83-billion in fiscal 2016. He expects these numbers will improve to EBITDA of $4.84-billion on a topline of $13.09-billion the following year.