US Fiber Expansion And Digital Shift Will Fuel Future Success In Telecom

Key Takeaways

• BCE's strategic acquisitions and digital shift drive growth and stabilize earnings by enhancing market presence, technology integration, and media revenue.
  
• Focus on high-value subscribers and business solutions boosts margins and revenue, enhancing service offerings and competitive positioning.
  
• Competitive pressures in wireless pricing and declining traditional media advertising impact revenue growth, net margins, and customer retention strategies.

Catalysts

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

• BCE's acquisition of Ziply Fiber provides a growth opportunity by expanding into the underpenetrated U.S. fiber market, expected to enhance long-term revenue and cash flow as they plan to build out the fiber network to more than 3 million locations. This aligns with BCE's core business and growth strategy, potentially increasing future earnings through strengthened market presence and scale.
  
• The company's focus on modernizing operations with technology and automation is expected to drive long-term CapEx and OpEx efficiencies, translating to improved net margins. The transition to cloud operations, despite moderating short-term margins, should significantly reduce cash costs in the future.
  
• The strategic shift to digital in Bell Media, including revenue growth from digital platforms like Crave and advanced advertising, is not only offsetting declines in traditional media but also driving media revenue and margin expansion. This should help stabilize and potentially grow future earnings.
  
• Increased focus on high-value, margin-accretive subscriber acquisitions in the wireless segment, rather than competing aggressively on low-margin promotions, is poised to improve service revenue and margins over time. As pricing stabilizes, this strategy should lead to stronger ARPU.
  
• BCE's investment in business solutions, particularly through acquisitions such as FX Innovation, aims to enhance its B2B tech services and cybersecurity expertise. This positions BCE well for continued revenue growth in the business solutions segment, supporting overall earnings growth.

BCE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BCE's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.3% today to 18.3% in 3 years time.
• Analysts expect earnings to reach CA$4.8 billion (and earnings per share of CA$4.63) by about December 2027, up from CA$84.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2027 earnings, down from 399.9x today. This future PE is lower than the current PE for the CA Telecom industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 4.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.57%, as per the Simply Wall St company report.

BCE Future Earnings Per Share Growth

Risks

• Sustained competitive pricing pressures and aggressive promotional offers in the wireless market are leading to service revenue decline and ARPU challenges, impacting overall revenue growth and net margins.
  
• Slower economic growth in the media advertising market, particularly on traditional platforms, is putting pressure on Bell Media’s revenue, affecting earnings growth.
  
• Decrease in product sales, especially in wireless and wireline, and closures of The Source stores, is negatively impacting total revenue, though this is partially offset by the low-margin nature of these sales.
  
• Asset impairment charges and declines in traditional TV and radio properties indicate market pressures and increased financial risk, negatively affecting net earnings.
  
• High postpaid churn and the competitive focus on protective pricing strategies suggest challenges in customer retention, potentially slowing revenue and net margin growth.

Valuation

• The analysts have a consensus price target of CA$42.43 for BCE based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$50.0, and the most bearish reporting a price target of just CA$37.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$26.5 billion, earnings will come to CA$4.8 billion, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 5.6%.
• Given the current share price of CA$36.82, the analyst's price target of CA$42.43 is 13.2% higher.
• 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.