Fresh off its latest quarterly results, investors may be wondering where Shaw Communications (Shaw Communications Stock Quote, Chart, News TSX:SJR.B) is heading. By rights, the stock should be trending north, says portfolio manager Ryan Bushell, who argues Shaw is undervalued.
Western Canadian telecom provider Shaw Communications saw its share price drop last week after posting what seemed to be strong earnings for its fiscal fourth quarter. The company’s topline was flat year-over-year at $1.35 billion but profits were up 5.4 per cent for the quarter ending August 31 at $175 million or $0.34 per share. Both numbers were beats of analysts’ consensus estimates at $1.33 billion and $0.31 per share.
Shaw launched its Mobile services in BC and Alberta over the quarter, a breakthrough for the company, and added fourth quarter Wireless subscribers to the tune of 60,000, a sign of better traffic at retail locations and strong demand for Shaw Mobile, the company said.
“It is because of our significant long-term investments in our facilities-based networks that we could meet the surge in demand from our customers, while at the same time, expand our product suite with innovative and affordable wireline and wireless options for Canadians during their greatest time of need, including our Fibre+ Gig Internet speeds and a momentous achievement with the launch of Shaw Mobile,” said executive chair and CEO Brad Shaw in an October 30 press release.
For the year, a particularly challenging one due to the COVID-19 pandemic, Shaw saw revenue grow by 1.3 per cent to $5.41 billion and adjusted EBITDA grow by 3.7 per cent. Looking ahead, Shaw offered guidance saying adjusted EBITDA would grow during fiscal 2021, that consolidated capital investments would come in at around $1 billion and free cash flow would hit about $800 million.
“While no business is completely immune to the impacts from COVID-19, we have shown that we are resilient, agile and can deliver growth to our stakeholders in even the direst of circumstances, including significant free cash flow growth of nearly 40 per cent, exceeding our target in fiscal 2020,” Shaw said.
That apparently upbeat picture was seemingly greeted by the market with a shrug, however, as SJR.B finished last week down 5.6 per cent. So far in 2020, Shaw has been behaving much like the rest of the Canadian telco scene, which is to say, not all that great. Shaw has faltered in trying to regain ground lost during the earlier days of the pandemic and is currently down 16 per cent for the year.
But the market may be missing out, says Bushell, president of Newhaven Asset Management, who spoke on BNN Bloomberg on Wednesday.
“Shaw is the most interesting case in Canada. I think the [quarterly] results recently were stronger than the market is giving credit for and the stock sold off on the back of them. I think it’s a buying opportunity,” said Bushell
“Shaw has some cross-currents. They have a lot of legacy landline business in terms of their internet division, however, that’s less troublesome than landline telephone. So, I think that they can continue to leverage that hybrid fibre cable coaxial network and continue to get their fair share of internet adds across Western Canada. On the wireless side they’ve actually been doing really, really well,” Bushell said.
As far as Shaw’s ability to build out its wireless infrastructure, Bushell thinks Shaw has the best of both worlds, saying, “One thing that’s under-appreciated with Shaw is that they’re getting ‘new entrant’ status to build a wireless network at pennies on the dollar or fractions on the dollar of the incumbents, but they still have the power of an incumbent in terms of leveraging their subscriber base into their mobile offering.”
“I think, longer term, the value of the infrastructure they’re able to build at a discount will ultimately shine through,” Bushell said. “The bigger question for me in the industry is what happens with satellite internet. That’s obviously a disruptive possibility that could shake the industry and that’s sort of an existential threat, but I think, overall, the [telecom] companies have done a good job through the pandemic. They’ve earned some points with the government and maybe the government’s a little bit more lenient with them on the back of the pandemic in a similar way that the government was more lenient with banks because the banks made them look good in 2008 and 2009, and so I think that all points to a pretty positive backdrop for the telecom companies.”
This week, Shaw announced its intentions for another share buyback program, often a sign that a company is not only cash-rich but thinks its share price is undervalued. Shaw just finished a Normal Course Issuer Bid to buy roughly 5.6 million Class B shares and intends to begin another for up to 24.5 million shares — about five per cent of all Class B shares — over the next 12 months.
Bushell said, “Shaw to me is trading at a discount from where it should be relative to the other players.”