Legacy TV Decline And Heavy Capex Will Choke Telecom Performance

Key Takeaways

• Declining legacy media revenues, market stagnation, and heightened competition threaten BCE's growth, margins, and earnings potential across core business segments.
  
• Ongoing high capital expenditures and increased regulatory constraints are pressuring cash flow, leverage, and BCE's long-term pricing power.
  
• Expansion in fiber and 5G, AI-driven enterprise growth, digital transformation, and U.S. diversification together drive resilience, margin gains, and future revenue stability for BCE.

Catalysts

A communications company, provides wireless, wireline, internet, streaming services, and television (TV) services to residential, business, and wholesale customers in Canada.

• BCE faces sustained decline in its legacy TV and media revenues as cord-cutting accelerates and consumers shift to competing streaming platforms, which is compounded by ongoing weakness in traditional broadcasting ad demand; this threatens a long-term erosion of both top-line revenue and segment EBITDA.
  
• Demographic stagnation and urban/rural divides are expected to severely constrain Canadian subscriber growth, undermining the addressable market for both broadband and wireless connectivity, and directly curbing the potential for revenue expansion across BCE's core business lines.
  
• The company's heavy and ongoing capital expenditure requirements to support fiber and 5G network build-outs-intensified by recent expansion into the US via Ziply Fiber-risk outpacing any slowing ARPU or subscriber growth, materially pressuring free cash flow and increasing net leverage over the coming years.
  
• Heightened regulatory scrutiny, including the Canadian government's refusal to alter expanded mandatory wholesale access rules, is expected to significantly curb BCE's pricing power and ability to protect current margins, leading to a long-term drag on net earnings and return on invested capital.
  
• Intensifying competition from both domestic and international entrants in wireless, fixed broadband, and streaming heightens the risk of increased churn, reduced market share, and persistent pricing pressure, driving further compression of net margins and limiting the company's prospects for sustainable earnings growth.

BCE Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on BCE compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming BCE's revenue will decrease by 0.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.8% today to 12.1% in 3 years time.
• The bearish analysts expect earnings to reach CA$2.9 billion (and earnings per share of CA$3.08) by about August 2028, up from CA$433.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 72.2x today. This future PE is greater than the current PE for the CA Telecom industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 2.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.1%, as per the Simply Wall St company report.

BCE Future Earnings Per Share Growth

Risks

• The accelerating rollout of BCE's fiber-to-the-home and 5G infrastructure, including the acquisition of Ziply Fiber and ongoing network expansion in both Canada and the U.S., positions the company for premium pricing, reduced churn, and average revenue per user growth, which may lead to sustainable top-line revenue and EBITDA increases.
  
• BCE's strategic pivot toward enterprise technology, particularly its role as the backbone of Canada's AI ecosystem through Bell AI Fabric, introduces new, unregulated revenue streams and high-growth free cash flow, underpinned by secular demand for AI infrastructure and sovereign data centers, supporting future revenue and earnings growth.
  
• The company's cost optimization, AI-powered customer service, and digital transformation initiatives have led to significant operating leverage improvements and margin expansion, which can structurally boost net earnings even in the face of potential industry headwinds.
  
• BCE has demonstrated robust subscriber acquisition and retention in both wireline (fiber) and wireless segments, with improved churn, strong postpaid subscriber growth, and effective bundling strategies, all of which suggest resilience and potential for stable or growing revenues and net margins.
  
• Ongoing diversification into the U.S. fiber market, partnerships such as the PSP Investments fiber build, and asset monetization opportunities further strengthen BCE's balance sheet, reduce capital intensity in the long run, and enhance free cash flow, mitigating risks to shareholder value and supporting potential share price appreciation.

Valuation

• The assumed bearish price target for BCE is CA$29.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of BCE's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$45.0, and the most bearish reporting a price target of just CA$29.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CA$24.3 billion, earnings will come to CA$2.9 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of CA$33.51, the bearish analyst price target of CA$29.0 is 15.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.