BCE Upgraded to Outperform - Analyst Blog

We have upgraded our recommendation for BCE Inc. (BCE) to “Outperform" based on the operator’s favorable outlook for fiscal 2010, which reflects encouraging prospects across its wireless and wireline broadband businesses.

 

BCE Inc. is Canada’s largest telecom carrier offering local and long-distance land-line phone service to roughly 70% of the Canadian population. The carrier’s wholly owned subsidiary Bell Canada operates its core wireline and wireless businesses as well as the direct-to-home (DTH) satellite television TV operation.

 

Reported earnings in the last quarter beat the Zacks Consensus Estimate. Healthy data revenue driven by expanded smartphone penetration coupled with contributions from the recent acquisitions has boosted revenue in the wireless segment. Moreover, growth in video and broadband Internet subscriber base continues to offset the declines in traditional wireline voice accesses.

 

Bell Canada’s full ownership of Virgin Mobile Canada has strengthened its national retail distribution network and enhanced selling channels. Moreover, the acquisition of Canada’s leading retail chain “The Source" has expanded Bell’s retail outlet count, enabling it to distribute its own branded products and services across 750 retail locations in Canada. Increased product sales driven by these two acquisitions have fuelled wireless revenue growth in the last quarter.

 

In November 2009, BCE launched the much-anticipated HSPA+ technology-based 3G network that offers peak downlink speeds of up to 21 megabits per second (Mbps). The carrier has collaborated with its Canadian peer Telus Corp. (TU) for sharing the expenditures related to this network upgrade, which has increased network efficiency and enhanced Bell Canada’s wireless voice and data service deployments.

 

Leveraging the new 3G HSPA+ network, Bell Canada launched Apple’s (AAPL) iPhones (3G and 3GS) and Research In Motion’s (RIMM) Blackberry Bold in Canada in late 2009, which have expanded the opportunities in wireless data.

 

Management continues to invest in broadband and wireless infrastructure upgrades, which is expected to generate higher revenue per user and attract new customers. BCE will increase capital spending in broadband in 2010 to facilitate fiber-to-the-home (FTTH) network deployment in Québec City, which will offer downlink speeds of at least 100 Mbps. The FTTH network will facilitate the roll-out of a broad range of new services.

 

BCE’s continued efforts to maximize shareholder returns in the form of dividend and share repurchases also remain encouraging. The carrier is committed to a dividend policy with a targeted dividend payout of 65% of annual adjusted EPS.

 

While we account for the increased domestic competition in 2010 (given the entry of new wireless carriers), we are encouraged by the management’s favorable guidance with opportunities for improved performance in wireless driven by the recent 3G network upgrade coupled with premium handset offerings and expanded distribution capabilities.