Take a pass on Rogers Communications, this portfolio manager says

The stock is still a good one to own, especially as a defensive play against market turmoil, but recent share price gains by Rogers Communications (Rogers Communications Stock Quote, Charts, News, Analysts, Financials TSX:RCI.B) mean that now might be prime time to trim your position. So says John Zechner of J. Zechner Associates, who thinks the Canadian telecom space has run far enough.

Canada’s Big Three telcos have been on quite a run lately, making up for lost time during the pandemic and then some. Whereas utilities were expected to do well over the first stretch of COVID, what with all the economic uncertainty, as the months went by it seemed clear that names like Rogers, BCE (BCE Stock Quote, Charts, News, Analysts, Financials TSX:BCE) and Telus (Telus Stock Quote, Charts, News, Analysts, Financials TSX:T) weren’t high on investors’ lists of places to hide. In fact, investment in riskier plays like high-growth tech names were all the rage.

But now with the market rotating away from growth and towards so-called value stocks, Canadian telecom stocks are all the rage, even as interest rates continue to climb, which in other times has been a drag on the telcos.

How good has it been? Over the past 12 months, BCE is up about 22 per cent, Telus is up about 28 per cent and Rogers is up 18 per cent — and that’s not including the healthy dividends paid out by each company. Since the start of the year, Rogers has been the higher-flyer, currently up 20 per cent, while BCE is up about seven per cent and Telus is has returned ten per cent.

For Zechner, those gains are enough for investors to consider at least taking a bit off the top.

“It’s funny, Rogers lagged a lot last year. Obviously, there were little worries about the Shaw deal and whether it’s actually going to get done. The stock has done better this year, just because people have been a little bit more defensive and they’ve run to the telecom sector for defensive positioning,” Zechner said, speaking on BNN Bloomberg on Tuesday.

“I like the telecom names across the board. Having said that, we’ve lightened on BCE, Telus and Rogers because they’ve hit our price targets in the shorter term,” he said.

It was last March that Rogers and Shaw Communications announced their proposed multi-billion dollar merger, saying the move would allow it to compete better on a national scale. Now over a year later, there are still some regulatory hoops to jump through, but the deal certainly looks more likely now than it did a year ago, especially seeing as the Canadian Radio-television and Telecommunications Commission (CRTC) gave its okay last month, leaving a couple more bodies in Canada’s Competition Bureau and Innovation, Science and Economic Development still to weigh in.

But last week with its first quarter financial report, Rogers said the $26-billion takeover of Shaw should likely close by the end of the current quarter. 

“Teams from both Rogers and Shaw continue to work constructively with the Competition Bureau and ISED Canada to ensure they have the information they need to assess the significant benefits the combined company will bring to Canadians and the Canadian economy,” said Rogers President and CEO Tony Staffieri in a press release.

Rogers saw its wireless service revenue and adjusted EBITDA grow by seven per cent year-over-year and contributing 66,000 postpaid mobile phone net additions. Meanwhile, the company said its Media segment saw a ten per cent rise in revenue, with the recovery of professional sports over the past year. 

Rogers saw revenue rise by four per cent year-over-year for the Q1 2021, hitting $3.619 billion, while adjusted net income was $462 million, up a full 17 per cent, and adjusted earnings were $0.91 per share compared to $0.77 per share a year earlier. Both top and bottom numbers were beats of analysts’ estimates.

Looking ahead, Rogers raised its full-year 2022 guidance on total service revenue, EBITDA and free cash flow.

“The Canadian economy is recovering and beginning to grow as immigration levels increase and COVID-19 restrictions have increasingly been relaxed or removed, including travel and capacity restrictions, masking mandates, and vaccine mandates,” the company said. “Travel volumes have increased in recent months, resulting in higher roaming revenue, and sporting events can now be filled to venue capacity, which will result in greater attendance and game day revenue as we welcome fans back to Rogers Centre.”

Zechner said fans of the telco space may want to look beyond the Big Three to perhaps Quebecor (Quebecor Stock Quote, Charts, News, Analysts, Financials TSX:QBR.B), which is in negative territory for the past 12 months.

“We’re more likely to play more of a dark horse like Quebecor which is lagging a little bit and it’s been hurt because of the fact that everyone worries that they’d buy all of Rogers’ excess assets and try to become a fourth national player. I don’t think they will and so that could help the valuation there,” Zechner said.

“We like the story still [on Rogers] but it’s had a decent move recently,” he said.