Telus is an overvalued stock, this investor says

Like many names in the utilities space, Telus (Telus Stock Quote, Chart TSX:T) has done well so far in 2019 —too well, says Brian Acker of Acker Finlay, who argues that not only is Telus in overbought territory, there likely won’t be an interest rate cut coming to give the stock a boost.

All eyes will be on the US Federal Reserve which is set to release a statement midweek on economic projections, including whether a change in interest rates is coming. And while many including US President Donald Trump are pitching for a rate cut to help boost the economy, there are indications that the Fed will hold steady on interest rates, with the Bank of Canada likely to follow suit.

A rate cut would be good news for the utilities, whose share prices often move in opposition to interest rates. Lower rates mean that constraints on their borrowing costs are less, meanwhile their dividend-paying stocks look more attractive in comparison to rates available in the bond market.

2018 was a difficult year for stocks like Telus, for example, as the overall feeling was that interest rates would keep rising. But with both the Fed and the Bank of Canada holding firm on rates over the last few quarters and, now, indications that a rate cut may be in the works later this year, share prices for utilities like Telus have flourished, with Telus now up six per cent year-to-date.

But Acker says that he’s less optimistic about an interest rate cut — and about Telus’ prospects to go higher.

“It’s a wonderful time to be a contrarian,” says Acker, president and CEO of Acker Finlay, to BNN Bloomberg on Friday. “Probably about 99 per cent of the people think that interest rates are going down. I guess having over thirty years experience in the market, I don’t think that’s a one-way trade.”

“Telus for me —and I’ve been saying this for years— is an interest-sensitive [stock] in Canada and it’s certainly over-valued relative to its earnings,” he says. “It closed [on Thursday] at $48.79 and we have a model price of $38.50. That’s a 28-per-cent negative discount that we see in terms of value.”

Telus last reported earnings in May, where its first quarter generated $437 million in profit, an increase from $412 million a year earlier, on operating revenue of $3.51 billion, up from $3.38 billion last year. Both its top and bottom lines were on target with analysts’ expectations.

“It’s paying 4.26 per cent [in dividend yield] and it covers its dividend,” says Acker. “But it’s just expensive. If I could get this back to $40, I’d be interested. Everyone is on the starboard side in terms of interest rates and I’m just not a believer yet that we’re going to zero.”

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