GICS Sector Telecommunication Services
Sub-Industry Integrated Telecommunication Services
Summary The second largest telecommunications company in Canada, TELUS provides wireless, wireline and broadband services to its subscribers.
Key Stock Statistics
(Source S&P, Vickers, company reports)52-Wk Range $47.40– 28.86 S&P Oper. EPS 2010E 3.18 Market Capitalization(B) $14.997 Beta 0.81
Trailing 12-Month EPS $3.01 S&P Oper. EPS 2011E 3.86 Yield (%) 4.47 S&P 3-Yr. Proj. EPS CAGR(%) 4 Trailing 12-Month P/E 15.6 P/E on S&P Oper. EPS 2010E 14.8 Dividend Rate/Share $2.10 S&P Credit Rating BBB+
$10K Invested 5 Yrs Ago $15,604 Common Shares Outstg. (M) 319.4 Institutional Ownership (%) 28 Price Performance
S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A
2007 2008 2009 2010 2011
3 30-Week Mov. Avg.
12-Mo. Target Price
10-Week Mov. Avg.
Relative Strength
GAAP Earnings vs. Previous Year Up Down No Change
Volume Above Avg.
Below Avg.
STARS
2505 30
40 50 60
0 400 800 1200 Vol.
(000)
5 1
Analysis prepared by James Moorman, CFA on November 22, 2010, when the stock traded at $ 44.10.
Highlights
➤
Following a 0.5% decline in 2009, we expect revenue to increase 1.3% in 2010 and another 2.1% in 2011, driven by wireless revenue growth. We believe the company will continue to see subscriber growth, but with increasing competitive pressures and product mix weigh- ing on average revenue per user. In our opin- ion, wireless revenue growth will more than off- set a slight revenue decline from continued line losses due to competitive pressure from the ca- ble companies and VoIP.
➤
We forecast total EBITDA margins of 38.3% in 2010 and 2011, unchanged from 2009. We be- lieve that cost-cutting in the wireline division will help offset declines in the wireless busi- ness due to subsidy and retention costs. We expect wireless margins to contract in 2010 and 2011 due to competition.
➤
Following operating EPS of $2.25 in 2009, we ex- pect a rebound to $3.18 in 2010 and a further in- crease to $3.86 in 2011.
Investment Rationale/Risk
➤
In our opinion, TU is facing competition on all fronts. However, the company continues to ex- hibit low single digit revenue growth, what we view as solid margins, and cash flow growth.
We believe wireless competition will continue to be stiff and could intensify as wireless pene- tration increases. We expect broadband growth to reaccelerate now that the billing sys- tem conversion has been resolved.
➤
Risks to our recommendation and target price include greater-than-expected competition and further pressure on EBITDA margins. An addi- tional facilities-based wireless competitor could further increase competition and pres- sure margins. Increased spending on the fiber initiative and new wireless spectrum or tech- nologies would reduce cash flow.
➤
Our 12-month target price of $45 is based on the average of our EV/EBITDA and P/E peer analy- ses. We assume an enterprise value of 5.5X our 2011 EBITDA estimate, slightly below larger- cap telecom peers. Our 2011 target P/E multiple of 12X is below larger-cap telecom peers.
Qualitative Risk Assessment
LOW MEDIUM HIGH
Our risk assessment reflects competition in both the wireline and wireless sectors, which we think could cause TELUS's margins to contract and reduce free cash flow. We believe these risks are offset by our view of its strong balance sheet.
Quantitative Evaluations
S&P Quality Ranking
BD C B- B B+ A- A A+
Relative Strength Rank
STRONG77
LOWEST = 1 HIGHEST = 99
Revenue/Earnings Data Revenue (Million $)
1Q 2Q 3Q 4Q Year
2010 2,339 2,261 2,385 -- --
2009 1,888 2,045 2,249 2,335 9,183 2008 2,287 2,355 2,312 2,005 7,886 2007 1,913 2,095 2,319 2,359 9,183 2006 1,783 1,915 1,983 1,935 7,450 2005 1,633 1,647 1,777 1,790 6,986 Earnings Per Share ($)
2010 0.83 0.90 0.74 E0.66 E3.18
2009 0.80 0.66 0.82 0.47 3.00
2008 0.88 0.81 0.84 0.73 2.87
2007 0.49 0.71 1.24 1.22 3.81
2006 0.51 0.91 0.83 0.59 2.77
2005 0.55 0.42 0.46 0.19 1.66
Fiscal year ended Dec. 31. Next earnings report expected: Mid February. EPS Estimates based on S&P Operating Earnings;
historical GAAP earnings are as reported.
Dividend Data
(Dates: mm/dd Payment Date: mm/dd/yy) Amount($)
Date Decl.
Ex-Div.
Date Stk. of Record
Payment Date
0.475 02/12 03/09 03/11 04/01/10 0.500 05/05 06/08 06/10 07/02/10 0.500 08/06 09/08 09/10 10/01/10 0.525 11/05 12/08 12/10 01/04/11
Dividends have been paid since 1999. Source: Company reports.
S&P Recommendation HOLD ★ ★ ★ ★ ★ Price
$46.96
(as of Jan 28, 2011)12-Mo. Target Price
$45.00
Please read the Required Disclosures and Analyst Certification on the last page of this report.
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Business Summary November 22, 2010
CORPORATE OVERVIEW. TELUS Corporation (TU) is the largest incumbent telecommunications company in Western Canada and the third largest facilities-based wireless operator, covering 33.7 million licensed points of presence (POPs). As of September 30, 2010, TU provided wireline service to 3.8 million access lines (down 5.6.% from a year earlier), with approximately 55% of the lines residential and the remaining 45% business lines. The wireline division also had roughly 1.2 million total Internet subscribers, of which 94% were high-speed subscribers. The company provides wireless service to roughly 6.9 million sub- scribers, with some 82% on postpaid plans and 18% on prepaid plans. In the third quarter of 2010, wireless revenues accounted for approximately 52% of total revenues and 56% of total EBITDA.
TU completed the acquisition of Emergis in January 2008 for roughly C$763 million. Emergis is an informa- tion technology company that derives about 78% of its revenues from the health care sector and 22% from the financial sector in Canada. Emergis provides electronic solutions for claims processing, health record systems, pharmacy management and credit card authorizations.
PRIMARY BUSINESS DYNAMICS. TU is one of three facilities-based wireless providers in Canada, and owns and operates two wireless networks. The company owns and operates a national digital PCS net- work with CDMA architecture in Alberta, BC, and eastern Quebec, and owns PCS spectrum throughout Canada. The company also owns an enhanced special mobile radio (ESMR) or iDEN network that provides service under the Mike trademark. In the third quarter of 2010, TELUS added 153,000 subscribers as churn declined to 1.54%, from 1.55% in the year-ago period. While the company has started to experience some pressure on its average revenue per user from voice, its data revenue is growing rapidly, rising 21% in the third quarter and accounting for roughly 25% of average revenue per user. For wireless, we expect EBIT- DA margin contraction in 2011 to 40.1%, due in part to competitive pressures, although it is still at the high end of the wireless industry.
In addition to its traditional wireline business, TU services the Internet market through broadband offer- ings. As of September 30, 2010, it had roughly 1,149,000 high-speed subscribers in Canada. The company owns a national inter-city fiber optic backbone network and local fiber optic networks in 34 metro areas. In addition, TU offered digital TV service, TELUS TV, to roughly 266,000 subscribers at the end of September 2010. We believe the company will continue to upgrade its fiber network in a variety of ways to facilitate its Internet service and the proliferation of TELUS TV.
COMPETITIVE LANDSCAPE. TU offers local wireline service as an incumbent in Alberta, BC, and in parts of Quebec, and operates as a competitive local exchange carrier throughout the remainder of Canada. The company competes for broadband and telephony subscribers with BCE, Inc., Shaw Communications, All- stream, Rogers Telecom and Cogeco. In part to battle the cable companies that began offering VoIP ser- vice, TU introduced TELUS TV in late 2005, and we believe this is an area the company will continue to fo- cus on.
On the wireless side, TU competes with facilities-based carriers Bell Mobility and Rogers Wireless as well as several mobile virtual network operators such as Virgin Mobile, cable companies such as Videotron and Eastlink, and other resellers. Canada instituted wireless number portability in March 2007, which we believe increased churn in the first quarter of 2008, but we believe it has returned to more normal levels.
IMPACT OF MAJOR DEVELOPMENTS. In September 2007, TELUS TV was launched in several Quebec communities as well as neighborhoods in Vancouver, Calgary and Edmonton.
FINANCIAL TRENDS. In 2009, TU spent C$2.10 billion (22% of revenues) on capital investments. We expect it to spend roughly C$1.7 billion in 2010, a decline from 2009 due to the early completion of the wireless HSPA upgrade. On the wireline side, we expect that the ADSL2+ network will be completed in 2010.
In 2008, TU spent C$280 million to repurchase 6.8 million of its shares; no shares were repurchased in 2009.
For 2010, the company expects revenue of C$9.7 billion to C$9.95 billion, EBITDA of C$3.6 billion to C$3.7 bil- lion, and EPS of C$3.10 to C$3.30.
Corporate Information Investor Contact
R. McFarlane (604-697-8044)
Office
8-555 Robson Street, Vancouver, BC, Canada V6B 3K9.
Telephone 604-697-8044.
Fax 604-432-9681.
Website www.telus.com
Officers Chrmn B.A. Canfield Pres & CEO D. Entwistle EVP & CFO R. McFarlane
SVP, Secy & General Counsel
A.T. Ho
Board Members R. H. Auchinleck A. Baillie M. Bouchard R. J. Butler B. A. Canfield P. Y. Ducros D. Entwistle R. E. Goepel J. Lacey W. MacKinnon B. MacNeill R. P. Triffo D. Woodley
Domicile Victoria Founded 1993 Employees 0
Stockholders 288,700
Redistribution or reproduction is prohibited without written permission. Copyright ©2011 The McGraw-Hill Companies, Inc.
Quantitative Evaluations S&P Fair Value
Rank
4 1 2 3 4 5
LOWEST HIGHEST
Based on S&P's proprietary quantitative model, stocks are ranked from most overvalued (1) to most undervalued (5).
Fair Value Calculation
$46.30 Analysis of the stock's current worth, based on S&P's proprietary quantitative model suggests that TU is fairly valued
Investability Quotient Percentile
42
LOWEST = 1 HIGHEST = 100
TU scored lower than 58% of all companies for which an S&P Report is available.
Volatility
LOW AVERAGE HIGHTechnical Evaluation
BULLISH Since January, 2011, the technical indicators for TU have been BULLISH.
Insider Activity NA
UNFAVORABLE NEUTRAL FAVORABLEKey Growth Rates and Averages
Past Growth Rate (%)
1 Year 3 Years 5 Years 9 YearsSales -0.49 3.72 5.09 4.72
Net Income -11.52 -4.51 13.34 NM
Ratio Analysis (Annual Avg.)
Net Margin (%) 10.39 11.98 11.49 7.16
% LT Debt to Capitalization 40.64 39.98 37.44 42.27
Return on Equity (%) 13.60 15.87 14.79 9.09
Company Financials Fiscal Year Ended Dec. 31
Per Share Data ($) 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Tangible Book Value NM NM NM 0.62 0.27 0.47 NM NM NM 1.69
Cash Flow 8.18 7.21 8.70 6.67 5.52 5.13 4.36 2.66 3.26 4.51
Earnings 3.00 2.87 3.81 2.77 1.66 1.30 0.70 -0.47 -0.32 1.23
Dividends 1.82 1.83 1.59 1.03 0.75 0.54 0.46 0.38 0.75 0.93
Payout Ratio 61% 64% 42% 37% 45% 42% 66% NM NM 76%
Prices:High 32.39 48.87 62.46 58.00 41.46 29.43 18.76 14.60 26.80 36.75
Prices:Low 22.46 24.19 39.67 36.39 27.15 14.22 9.37 3.50 10.65 23.25
P/E Ratio:High 11 17 16 21 25 23 27 NM NM 30
P/E Ratio:Low 7 8 10 13 16 11 13 NM NM 19
Income Statement Analysis (Million Can. $)
Revenue 9,606 9,653 9,074 8,681 8,143 7,581 7,146 7,007 7,203 6,433
Operating Income 3,681 3,838 3,610 3,658 3,349 3,143 2,845 2,519 2,530 2,465
Depreciation 1,722 1,713 1,615 1,576 1,624 1,643 1,653 1,570 1,669 1,212
Interest Expense 483 478 478 517 682 652 671 604 625 317
Pretax Income 1,205 1,567 1,498 1,482 1,030 826 512 -266 -42.0 966
Effective Tax Rate 16.8% 27.8% 15.6% 23.7% 31.3% 30.9% 34.6% NM NM 51.3%
Net Income 998 1,128 1,258 1,123 700 566 332 -227 -139 461
Balance Sheet & Other Financial Data (Million Can. $)
Cash 41.0 4.00 62.3 110 8.60 896 6.20 Nil 17.0 100
Current Assets 1,127 1,558 1,341 1,345 1,243 2,648 1,517 1,173 1,443 1,749
Total Assets 19,219 19,160 16,988 16,508 16,222 17,838 17,478 18,220 19,266 16,415
Current Liabilities 2,964 3,057 2,686 3,738 2,028 1,969 2,155 2,181 1,860 6,670
Long Term Debt 6,090 6,348 4,584 3,494 4,640 6,332 6,469 8,198 8,651 3,047
Common Equity 7,554 7,182 6,926 6,928 6,871 7,026 6,591 6,363 6,917 6,348
Total Capital 14,984 14,809 12,584 11,513 12,560 14,363 14,148 15,634 16,965 9,539
Capital Expenditures 2,103 1,859 1,770 1,618 1,319 1,319 1,253 1,693 2,249 1,441
Cash Flow 2,720 2,841 2,873 2,698 2,324 2,207 1,981 1,339 1,526 1,669
Current Ratio 0.4 0.5 0.5 0.4 0.6 1.3 0.7 0.5 0.8 0.3
% Long Term Debt of Capitalization 40.6 42.9 36.4 30.3 36.9 44.1 45.7 52.4 51.0 31.9
% Net Income of Revenue 10.4 11.7 13.9 12.9 8.6 7.5 4.6 NM NM 7.2
% Return on Assets 5.2 6.2 7.5 6.9 4.1 3.2 1.9 NM NM 3.8
% Return on Equity 13.6 16.0 18.0 16.3 10.1 8.3 5.1 NM NM 8.6
Data as orig reptd.; bef. results of disc opers/spec. items. Per share data adj. for stk. divs.; EPS diluted. E-Estimated. NA-Not Available. NM-Not Meaningful. NR-Not Ranked. UR-Under Review.
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Sub-Industry Outlook Stock Performance
Our fundamental outlook for the integrated telecommunications services (wireline) sub-industry for the next 12 months is neutral, as we believe large integrated services providers will generate modest free cash flow from broadband growth and cost savings to support dividends.
Due to consolidation, the two dominant carriers in the sub-industry are AT&T Inc. (T 30, Strong Buy) and Verizon Communications (VZ 37, Hold), whose revenues we see growing modestly in 2010. Recent merger activity at mid-size carriers includes CenturyLink's (CTL 47, Hold) pending agreement to acquire Qwest Communications (Q 8, Hold), and the purchase by Frontier Communications (FTR 10, Buy) of certain rural assets from VZ, which closed in July 2010.
We believe carriers face some challenges even as the economy begins to improve. With high unemployment levels, telcos with a metropolitan focus are incurring a loss of access line customers, but growth in broadband has picked up due to demand for faster connections. We also believe consumers are still seeking alternatives to higher priced cable broadband. In 2011, we expect gains in wireless for large carriers and more stability in wireline operations at the mid-size firms. We also expect sales to enterprise customers to begin to recover. In our view, with carriers likely to exhibit either slow revenue growth or modest pressure, depending upon their business mix, cost-saving measures such as ongoing work force reductions, back office integration and network grooming will prove key drivers for carrier results. Despite headlines, we saw only limited benefits from government support for broadband in 2010.
We expect the telecom providers to invest to further roll out their successful fiber-based services to
support broadband growth in 2011. During 2010, some mid-sized carriers were more active in building out their networks and increasing connection speeds. We expect universal service to eventually support high-speed network expansion, and we think improved clarity on network neutrality rules is moderately positive.
In our view, telecom providers are generating sufficient cash to support their dividends, although well-above-average dividend yields indicate that investors have concerns, which we view as largely unfounded.
In 2010, the sub-industry index rose 11.3%, underperforming the S&P 1500's increase of 14.2%, with relative performance significantly improved since the end of the first quarter. We have a neutral fundamental outlook and believe most stocks are trading near fair value, despite offering strong total return potential.
--Todd Rosenbluth
GICS Sector:
Telecommunication ServicesSub-Industry:
Integrated Telecommunication ServicesBased on S&P 1500 Indexes
Month-end Price Performance as of 12/31/10
2006 2007 2008 2009 2010 2011 180
160 140 120
100 80 60
40 20 0
Sub-Industry Sector S&P 1500
NOTE: All Sector & Sub-Industry information is based on the Global Industry Classification Standard (GICS)
Sub-Industry : Integrated Telecommunication Services Peer Group*: International Telecom Services (Mid-Sized)
Peer Group
Stock Symbol
Stk.Mkt.
Cap.
(Mil. $) Recent
Stock Price($)
52 Week
High/Low($) Beta Yield
(%) P/E Ratio
Fair Value Calc.($)
Quality Ranking
S&P IQ
%ile Return on
Revenue (%)
LTD to Cap (%)
TELUS Corp TU 14,997 46.96 47.40/28.86 0.81 4.5 16 46.30 B 42 10.4 40.6
Hellennic Telecommunic ADR HLTOY 4,833 4.93 7.06/3.30 1.34 2.2 38 NA NR 20 6.8 81.1
Magyar Telekom Telecom ADR MYTAY 2,859 13.73 21.82/11.90 1.24 11.9 9 NA NR 21 12.1 31.2
Manitoba Telecom Svcs MBT.C 2,002 30.93 34.01/24.71 NA 5.5 20 NA B NA 5.7 43.9
P.T. Telekomunikasi ADR TLK 16,375 33.30 43.80/30.33 1.10 3.3 14 29.90 NR 51 16.8 23.9
Portugal Telecom SGPS ADR PT 9,935 11.34 15.24/8.25 0.68 14.0 1 11.10 NR 22 10.1 84.3
TELUS Corp T.C 8,561 48.97 49.32/32.03 NA 4.3 16 NA B NA 13.9 36.4
Tata Communications ADS TCL 1,442 10.12 15.39/9.02 0.81 1.7 NM NA NR 6 NM NA
Telecom Argentina'B'*ADS TEO 2,548 25.38 27.23/14.79 1.20 5.2 11 23.70 NR 40 11.5 0.9
Telecom Corp New Zealand ADR NZT 3,396 8.84 8.94/5.90 1.12 7.1 15 6.50 NR 27 7.4 50.1
Telecomunicaoes Sao Paulo ADR TSP 12,434 24.58 25.63/17.50 0.63 9.3 10 21.90 NR 68 13.8 12.9
Telekom Austria AG ADR TKAGY 6,014 27.18 31.96/21.60 1.11 4.9 14 NA NR 21 2.0 66.6
Telenor ASA ADS TELNY 24,838 45.20 51.40/33.20 1.88 2.1 10 NA NR 20 9.3 28.5
NA-Not Available NM-Not Meaningful NR-Not Rated. *For Peer Groups with more than 15 companies or stocks, selection of issues is based on market capitalization.
Source: S&P.
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S&P Analyst Research Notes and other Company News
December 14, 2010
TU says it expects '11 EBITDA growth of up to 6% and double-digit EPS and Free Cash Flow growth $200M voluntary pension contribution. Says targets reflect growth empowered by its significant broadband infrastructure investments consistent with co.'s long-standing national growth strategy focused on wireless and data. Targets '11 consolidated revenue increase over 2010 of 1% to 4%.
November 5, 2010
02:03 pm ET ... S&P MAINTAINS HOLD OPINION ON SHARES OF TELUS CORP (TU 43.59***): TU reports Q3 earnings per share, before one-time items, of $0.85, vs.
$0.75, $0.12 below our estimate. The miss was due to slightly lower than expected EBITDA and nonoperating expenses. We expect that wireless will remain solid and more than offset a declining wireline business in 2011. We are reducing our 2010 earnings per share estimate by $0.21 to $3.18, but raising our 2011 estimate by $0.07 to $3.86. We are increasing our 12-month target price by $5 to $45, based on enterprise value/EBITDA and a revised P/E multiple still below peers.
/J.Moorman, CFA August 6, 2010
03:48 pm ET ... S&P MAINTAINS HOLD OPINION ON SHARES OF TELUS CORP (TU 38.13***): TU reports Q2 earnings per share of $0.87, vs. $0.61, and $0.04 better than our estimate. Revenue was in line with our estimate, and EBITDA was 0.8%
worse than expected, as lower than expected depreciation accounted for the beat. We believe wireless operations are doing well, in part on its iPhone 4 offering; but wireline remains weak. We are increasing our 2010 earnings per share estimate by $0.15 to $3.39 an '11's by $0.29 to $3.79. We are raising our 12-month target price by $1 to $40, based on enterprise value/EBITDA and a P/E multiple below peers. /J.Moorman-CFA
May 5, 2010
01:56 pm ET ... S&P MAINTAINS HOLD OPINION ON SHARES OF TELUS CORP (TU 36.36***): TU reports Q1 earnings per share of $0.80 vs. $0.66, in line with our estimate. Revenue was 2% below our estimate due to lighter than expected wireline revenue, but EBITDA was 1.3% better than our estimate on wireline cost-cutting iniatives. We are raising our 2010 earnings per share estimate by
$0.14 to $3.24 and 2011's by $0.27 to $3.50. We believe TU is making good headway in improving its wireless postpaid business as well as cost-cutting in wireline. We are increasing our 12-month target price by $7 to $39, based on revised enterprise value/EBITDA and P/E analysis. /J.Moorman, CFA
February 12, 2010
01:33 pm ET ... S&P MAINTAINS HOLD OPINION ON SHARES OF TELUS CORP (TU 30.15***): TU reports Q4 earnings per share of $0.23 vs. $0.66, $0.17 below our estimate. Revenues and EBITDA were higher than expected, but more than offset by greater than expected financing costs from the early redemption of debt. We are reducing our '10 earnings per share estimate by $0.02 to $3.10 on higher expected wireless subsidies due to smartphone adoption. We are introducing our '11 earnings per share estimate of $3.23. We are raising our 12-month target price by $1 to $32, based on enterprise value/EBITDA and a P/E multiple below peers.
/J.Moorman, CFA December 15, 2009
11:01 am ET ... S&P MAINTAINS HOLD OPINION ON SHARES OF TELUS CORP (TU 29.0***): TU this morning revised its 2009 forecast to the lower end of its range for revenue and EBITDA and introduced its 2010 forecast. We are reducing our 2009 EPS estimate by $0.09, but raising our 2010 estimate by $0.07 to $3.12. The increase to our 2010 estimate is based on our expectation for higher wireless revenue growth, slightly offset by projected lower wireline growth. While we are encouraged by TU's solid wireless forecast, we remain cautious about wireline growth. We maintain our 12-month target price of $31, based on enterprise value/EBITDA and a P/E multiple below peers. /J.Moorman, CFA
November 11, 2009
05:03 pm ET ... S&P MAINTAINS HOLD OPINION ON SHARES OF TELUS CORP (TU 29.95***): Following TU's Q3 earnings per share of $0.75, we are adjusting our estimates upon further model revisions. We are reducing our '09 earnings per share estimate by $0.25 to $2.51 and '10 by $0.15 to $3.05. The change in our estimates reflect lower estimates for revenue and EBITDA growth at both the wireline and wireless divisions. We believe TU continues to do well in containing costs in a competitive environment. We are reducing our 12-month target price
by $1 to $31 on enterprise value/EBITDA and a P/E multiple below peers.
/J.Moorman-CFA November 6, 2009
08:57 am ET ... S&P MAINTAINS HOLD OPINION ON TELUS CORP SHARES (TU 29.97***): TU posts Q3 EPS of US$0.75 vs. US$0.86, in line with our estimate.
Revenues matched our forecast, with expected pressure in wireline, while EBITDA was slighlty lower. We believe TU will continue to face difficulties due to the Canadian economy and what we view as a competitive wireless environment.
However, we think the company is making good progress on containing costs. As such, we maintain our '09 earnings estimate of US$2.76 and '10's at US$3.12. We keep our 12-month target price at $32 based on relative peer analysis. /J.
Moorman-CFA, T.Rosenbluth August 7, 2009
03:44 pm ET ... S&P MAINTAINS HOLD OPINION ON SHARES OF TELUS CORP (TU 29.39***): TU reports Q2 EPS, before one-time item, of $0.61 vs. $0.83, $0.16 below our estimate, on lower revenue and EBITDA than we expected. We are reducing our '09 EPS estimate by $0.29 to $2.76 and '10 by $0.15 to $3.12. We believe TU will continue to face difficulties due to the economy and a competitive wireless environment, but think the company is doing well regarding containing costs in a competitive environment. We are raising our 12-month target price by $2 to $32, on revised enterprise value/EBITDA and a P/E analysis, due to lower net debt.
/J.Moorman-CFA
Source: S&P.
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Glossary
S&P STARSSince January 1, 1987, Standard and Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future total return potential versus the expected total return of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index)), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.
STARS Average Annual Performance
S&P 500 5 STARS 4 STARS 3 STARS 2 STARS 1 STARS
0 800 1,600 2,400
91 93 95 97 99 '01 '03 '05 '07 '09
S&P 12-Month Target Price
The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.
Investment Style Classification
Characterizes the stock as Growth or Value, and indicates its capitalization level. Growth is evaluated along three dimensions (earnings, sales and internal growth), while Value is evaluated along four dimensions (book-to-price, cash flow-to-price, dividend yield and sale-to-price). Growth stocks score higher than the market average on growth dimensions and lower on value dimensions. The reverse is true for Value stocks.
Certain stocks are classified as Blend, indicating a mixture of growth and value characteristics and cannot be classified as purely growth or value.
Qualitative Risk Assessment
The S&P equity analyst's view of a given company's operational risk, or the risk of a firm's ability to continue as an ongoing concern. The Qualitative Risk Assessment is a relative ranking to the S&P U.S. STARS universe, and should be reflective of risk factors related to a company's operations, as opposed to risk and volatility measures associated with share prices.
Quantitative Evaluations
In contrast to our qualitative STARS recommendations, which are assigned by S&P analysts, the quantitative evaluations described below are derived from proprietary arithmetic models. These computer-driven evaluations may at times contradict an analyst's qualitative assessment of a stock. One primary reason for this is that different measures are used to determine each. For instance, when designating STARS, S&P analysts assess many factors that cannot be reflected in a model, such as risks and opportunities, management changes, recent competitive shifts, patent expiration, litigation risk, etc.
S&P Quality Ranking
Growth and stability of earnings and dividends are deemed key elements in establishing S&P's Quality Rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:
A+
A A- B+
NR Highest High Above Average Average Not Ranked
B B- C D
Below Average Lower Lowest In Reorganization
S&P Fair Value Rank
Using S&P's exclusive proprietary quantitative model, stocks are ranked in one of five groups, ranging from Group 5, listing the most undervalued stocks, to Group 1, the most overvalued issues. Group 5 stocks are expected to generally outperform all others. A positive (+) or negative (-) Timing Index is placed next to the Fair Value ranking to further aid the selection process.A stock with a (+) added to the Fair Value Rank simply means that this stock has a somewhat better chance to outperform other stocks with the same Fair Value Rank. A stock with a (-) has a somewhat lesser chance to outperform other stocks with the same Fair Value Rank. The Fair Value rankings imply the following: 5-Stock is significantly undervalued; 4-Stock is moderately undervalued; 3-Stock is fairly valued; 2-Stock is modestly overvalued; 1-Stock is significantly overvalued.
S&P Fair Value Calculation
The price at which a stock should trade at, according to S&P's proprietary quantitative model that incorporates both actual and estimated variables (as opposed to only actual variables in the case of S&P Quality Ranking).
Relying heavily on a company's actual return on equity, the S&P Fair Value model places a value on a security based on placing a formula-derived price-to-book multiple on a company's consensus earnings per share estimate.
Insider Activity
Gives an insight as to insider sentiment by showing whether directors, officers and key employees who have proprietary information not available to the general public, are buying or selling the company's stock during the most recent six months.
Funds From Operations FFO
FFO is Funds from Operations and equal to a REIT's net income, excluding gains or losses from sales of property, plus real estate depreciation.
Investability Quotient (IQ)
The IQ is a measure of investment desirability. It serves as an indicator of potential medium-to-long term return and as a caution against downside risk. The measure takes into account variables such as technical indicators, earnings estimates, liquidity, financial ratios and selected S&P proprietary measures.
S&P's IQ Rationale:
TELUS Corp
Proprietary S&P Measures Technical Indicators Liquidity/Volatility Measures Quantitative Measures
Raw Score 44 28 9 20
Max Value 115 40 20 75
IQ Total 101 250
Volatility
Rates the volatility of the stock's price over the past year.
Technical Evaluation
In researching the past market history of prices and trading volume for each company, S&P's computer models apply special technical methods and formulas to identify and project price trends for the stock.
Relative Strength Rank
Shows, on a scale of 1 to 99, how the stock has performed versus all other companies in S&P's universe on a rolling 13-week basis.
Global Industry Classification Standard (GICS) An industry classification standard, developed by Standard & Poor's in collaboration with Morgan Stanley Capital International (MSCI). GICS is currently comprised of 10 Sectors, 24 Industry Groups, 68 Industries, and 154 Sub-Industries.
S&P Issuer Credit Rating
A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation.
The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
Exchange Type
ASE - American Stock Exchange; NNM - Nasdaq National Market; NSC - Nasdaq SmallCap; NYSE - New York Stock Exchange; BB - OTC Bulletin Board; OT - Over-the-Counter; TO - Toronto Stock Exchange.
S&P Equity Research Services
Standard & Poor's Equity Research Services U.S.
includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC-London; Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo, Standard & Poor's Malaysia Sdn Bhd, and Standard & Poor's Information Services (Australia) Pty Ltd.
Abbreviations Used in S&P Equity Research Reports CAGR- Compound Annual Growth Rate; CAPEX- Capital Expenditures; CY- Calendar Year; DCF- Discounted Cash Flow; EBIT- Earnings Before Interest and Taxes; EBITDA- Earnings Before Interest, Taxes, Depreciation and Amortization; EPS- Earnings Per Share; EV- Enterprise Value; FCF- Free Cash Flow; FFO- Funds From Operations;
FY- Fiscal Year; P/E- Price/Earnings ; PEG Ratio- P/E-to-Growth Ratio; PV- Present Value; R&D- Research
& Development; ROE- Return on Equity; ROI- Return on Investment; ROIC- Return on Invested Capital; ROA- Return on Assets; SG&A- Selling, General &
Administrative Expenses; WACC- Weighted Average Cost of Capital
Dividends on American Depository Receipts (ADRs) and American Depository Shares (ADSs) are net of taxes (paid in the country of origin).
Source: S&P.
Redistribution or reproduction is prohibited without written permission. Copyright ©2011 The McGraw-Hill Companies, Inc.
Required Disclosures
S&P Global STARS DistributionIn North America: As of December 31, 2010, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 35.0% of issuers with buy recommendations, 56.4% with hold recommendations and 8.6% with sell recommendations.
In Europe: As of December 31, 2010, research analysts at Standard & Poor's Equity Research Services Europe have recommended 33.6% of issuers with buy recommendations, 45.6% with hold recommendations and 20.8% with sell recommendations.
In Asia: As of December 31, 2010, research analysts at Standard & Poor's Equity Research Services Asia have recommended 39.4% of issuers with buy
recommendations, 51.8% with hold recommendations and 8.8% with sell recommendations.
Globally: As of December 31, 2010, research analysts at Standard & Poor's Equity Research Services globally have recommended 35.2% of issuers with buy recommendations, 54.0% with hold recommendations and 10.8% with sell recommendations.
★★★★★
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.★★★★★
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.★★★★★
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.★★★★★
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price not anticipated to show a gain.★★★★★
1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.Relevant benchmarks: In North America the relevant benchmark is the S&P 500 Index, in Europe and in Asia, the relevant benchmarks are generally the S&P Europe 350 Index and the S&P Asia 50 Index.
For All Regions: All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed in this research report.
Additional information is available upon request.
Other Disclosures
This report has been prepared and issued by Standard &
Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard
& Poor's ("S&P"), in the United Kingdom by Standard &
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Disclaimers
This material is based upon information that we consider to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material is not intended for any specific investor and does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.
For residents of the U.K. - This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, respectively.
For residents of Singapore - Anything herein that may be construed as a recommendation is intended for general circulation and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Advice should be sought from a financial adviser regarding the suitability of an investment, taking into account the specific investment objectives, financial situation or particular needs of any person in receipt of the recommendation, before the person makes a commitment to purchase the investment product.
For residents of Malaysia - All queries in relation to this report should be referred to Alexander Chia, Desmond Ch'ng, or Ching Wah Tam.
This investment analysis was prepared from the following sources: S&P MarketScope, S&P Compustat, S&P Industry Reports, I/B/E/S International, Inc.;
Standard & Poor's, 55 Water St., New York, NY 10041.
Source: S&P.
Redistribution or reproduction is prohibited without written permission. Copyright ©2011 The McGraw-Hill Companies, Inc.
