BCE stock has only modest upside, Echelon Wealth Partners says

He thinks holding the stock is better than holding cash, but Echelon Wealth Partners analyst Rob Goff doesn’t think investors who are swinging for the fences should be buying BCE (BCE Stock Quote, Chart, News: TSX:BCE, NYSE:BCE).

On Thursday, BCE reported its Q3, 2017 results. The company earned $817-million on revenue of $5.68-billion, a topline that was up five per cent over the same period last year.

“The competitive advantages enabled by Bell’s advanced fibre and wireless networks, coupled with strong execution of our broadband innovation strategy by the Bell team throughout Canada, delivered almost 200,000 net new broadband postpaid wireless, Internet and IPTV customers in Q3 — up more than 8 per cent compared to last year — and significant increases in network usage, revenue and customer satisfaction,” said CEO George Cope. “The rapid pace of Bell’s broadband Fibe and mobile LTE-A network deployments and service innovation supported a record number of Q3 postpaid wireless gross activations and our best Q3 postpaid net additions since 2012, as well as our first quarter of year-over-year combined Internet and IPTV customer increases since Q1 2015 — including net positive growth in our overall national TV business. With Bell LTE coverage reaching 99 per cent of Canadians in Q3, and 86 per cent of our mobile customers now using Canada’s best national network, strong growth in mobile data usage continued to support industry-leading wireless revenue and adjusted EBITDA growth. Strong Fibe TV and Internet customer increases drove wireline adjusted EBITDA growth of 4.4 per cent and enhanced customer satisfaction as the Fibe footprint continues to grow, while also improving our results in home phone and business NAS. Bell Media continued to build on its leadership in multimedia, including the most-watched programs in both conventional, specialty and pay-TV, resulting in revenue growth and steady adjusted EBITDA performance in a fast-changing media marketplace.”

Goff notes that BCE’s bottom line sets up quite differently than its peers.

“BCE’s financial discipline saw the Company highlight incremental revenue to EBITDA flow through margins as part of a focus on margins,” the analyst says. “BCE’s focus on FCF saw discussion on wireless capital intensity of ~9% while better wireline EBITDA supports considerations of accelerated fibre deployment. Deleveraging and dividend growth were put ahead of share repurchases. These points encapsulate our view and heavily influence our peer group viewpoints. BCE needs continued strong wireless financials to achieve expectations for sustainable EBITDA and, in turn, dividend growth. This point considers that wireless is ~36% of consolidated EBITDA versus 66% for both peers TELUS and Rogers. Within wireless, reported financials have significantly greater ARPU leverage than realistic market share gains. We believe this point has very high read-through significance for its peers.”

In a research update to clients Friday, Goff maintained his “Hold” rating and one-year price target of $62.00 on BCE, implying a return of 10.2 per cent at the time of publication.

The analyst thinks BCE will generate EBITDA of $9.21-billion on revenue of $22.8-billion in fiscal 2017. He expects those numbers will improve to EBITDA of $9.53-billion on a topline of $23.6-billion the following year.

“While we continue to see BCE as a defensive stock (thus our hold rating), we maintain our preference for Rogers across our largest capitalization coverage names given its relative valuation, wireless exposure, and competitive balance,” Goff adds.