Rogers Stock Drop Shows Investors Want Growth: Corporate Canada

Jun 05, 2014 8:44 am ET

June 5 (Bloomberg) -- Rogers Communications Inc. investors are getting impatient as they wait for the new chief executive officer to turn Canada’s biggest wireless-phone operator back into a growth company.

Rogers, which signed up fewer customers than its rivals last quarter, is the worst-performing stock among its Canadian telecommunications peers this year. Analysts expect revenue to slide for a third straight quarter, and net income may fall 6.9 percent in 2014 for the biggest drop since Rogers swung to a net loss in 2004, according to estimates compiled by Bloomberg.

Guy Laurence, who took over as CEO in December, said he’s more focused on creating long-term value and boosting revenue than reversing the trend of trailing subscriber growth in the next few quarters. As part of a seven-point plan he laid out last month, Laurence wants to improve customer service and sell more products to businesses. He’s said he isn’t planning to sell parts of the company, something analysts, including at Barclays Plc, expected he would do to make Rogers more efficient.

“There’s not really much of a strategy you can put your hands around,” Dvai Ghose, a Toronto-based analyst with Canaccord Genuity Group Inc., said in a phone interview. “I expected him to talk more about cost-cutting. I guess he’s more optimistic in talking about revenue growth.”

Rogers shares have fallen 7.1 percent this year, the only decline among the five Canadian companies in the S&P/TSX Telecom Services Index, which has gained 8.2 percent. BCE Inc. is up 11 percent, and Telus Corp., another one of its main competitors, has risen 16 percent.

Fewer Customers

Rogers has also trailed the gains of U.S. telecommunications companies such as AT&T Inc. and Verizon Communications Inc.

Rogers added 2,000 new contract customers last quarter, compared with 33,964 for BCE and 48,000 for Telus, its main competitors. A year ago, Rogers had added 32,000 new subscribers.

“You can only pay your shareholders in cash, you can’t give them customer bodies, so we need to get away from these metrics of volume and look at value,” Laurence said at a May 23 meeting with reporters at Rogers’s headquarters in Toronto. “We’re not a growth company at the moment, but I believe we can return to growth. It’s not going to happen in weeks, it’s not going to happen in months.”

The CEO’s plan seeks to refocus the Toronto-based company on customer service. He also wants to sell more products to an “underserved” business market and “deliver compelling content anywhere.”

Investors Understand

“The people who own this company take the long-term view,” Patricia Trott, a spokeswoman for Rogers, said in an e- mailed response to questions yesterday. “They understand you can’t go from a volume mentality to a value-based mentality without going through some bumps.”

Ted Rogers, whose father pioneered radio technology in Canada, started the Rogers cable company in 1967. Today, in addition to providing wireless, home phone and Internet service, the company runs TV networks and owns stakes in Toronto’s three major-league sports teams. Last year, Rogers signed a 12-year, C$5.2 billion ($4.8 billion) deal with the National Hockey League for exclusive rights to broadcast the games in Canada.

Ghose, the analyst at Canaccord, said he was expecting more from Laurence’s first big announcement.

“To be fair, it’s early days,” said Ghose, who recommends selling Rogers shares. “He’s only been there since December.”

Laurence previously ran the U.K. and Dutch units of Vodafone Group Plc, the world’s second-largest wireless carrier. Before that, he worked at a range of media companies including MGM Studios. Vodafone said on June 3 Rogers will become Vodafone’s preferred roaming partner in Canada. The deal also includes joint marketing agreements.

Bumpy Ride

It’s been a bumpy ride for Laurence in his first months at Rogers. First-quarter earnings and sales fell short of analysts’ estimates, with net income dropping 13 percent to C$307 million and revenue down less than 1 percent at C$3.02 billion.

The shares closed yesterday at C$44.64 in Toronto. Analysts don’t predict the stock will move much higher anytime soon. They expect it to be trading at C$45.13 in 12 months, up only 1.1 percent, according to the average of 17 price targets compiled by Bloomberg.

“It’s not a turnaround that happens sooner rather than later,” said Greg Eckel, a fund manager at Morgan Meighen & Associates Ltd. in Toronto. His firm manages about C$1.4 billion, including Rogers shares.

“The plan he’s coming up with seems to be positive, and it’s a great company, but does it run away on the upside? Probably not,” Eckel said in a phone interview. “It’s slow and steady and mature now.”

Customer Satisfaction

Laurence has his work cut out for him. Rogers tied BCE for the worst customer satisfaction among major Canadian wireless operators, according to a 2014 survey by market research firm J.D. Power & Associates. Rogers ranked last in factors including cost and performance.

“We have neglected our customers over recent years,” Laurence said in the meeting with reporters, adding that winning back customers’ trust will take time. He said he hopes Rogers’s brand can become as identifiable with consumers as Apple Inc.’s.

For now, Rogers faces pressure from Telus and BCE as they add subscribers and their TV businesses take market share from Rogers’s cable systems, Drew McReynolds, a Toronto-based analyst with Royal Bank of Canada, said in a May 29 note to clients. He rates Rogers shares the equivalent of hold.

While Rogers’s financial results may be volatile for several quarters, Maher Yaghi, an analyst at Desjardins Securities Inc., said Laurence is ultimately focused on the right objectives like boosting revenue. Investors will probably wait until the end of the year to get back into the stock, he said.

“You at least want to see some kind of stabilization because at this point in time they haven’t showed that yet,” Yaghi said in a phone interview.

--With assistance from Eric Lam in Toronto.