Sample Report – Telus

Telus (T, Toronto)

THIS IS AN EXAMPLE REPORT FROM LATE 2004 – We rated TELUS  a Speculative Buy at that time.

This Sample Shows you the content of the reports and you can see there is a lot of analysis and thought that goes into our ratings.


Report Author: Shawn Allen
Author’s disclosure of share ownership: I hold no shares
Based on financials from: Dec 03 Y.E. + Q2 ’04
Last updated: 6-Oct-04
Share Price At Date of Last Update: $28.00
Currency: $ Canadian
Current Rating (Company Rating does not consider the circumstances of any individual investor and is therefore not a recommendation and is not Investment Advice): THIS OLD SPECULATIVE BUY RATING FROM 2004 IS FOR EXAMPLE ONLY AS IT IS NOW COMPLETELY OUT OF DATE. The rating per this old report was Speculative Buy
DESCRIPTION OF BUSINESS: Incumbent local exchange and long distance provider in Alberta, BC and a part of Quebec. Has strong market share in those areas for local, long distance, internet and mobile. As non-incumbent is achieving good penetration in Ontario and Quebec in mobile and internet access service.
RATING: The value ratios would suggest a hold. However, Telus appears to be trending up to significantly higher earnings. Past investments in building a huge cell-phone and internet subscriber base are materializing in rising cash flows. Continues to add significantly to customer base. Has industry-leading low churn rate. This is a company where the value is not yet apparent in the earnings. However, I believe earnings will rise sharply and that it is therefore a good but Speculative pick at this time. I rate it a Speculative Buy.
RISKS: Aggressive competition and competing technologies are the major risk factors. Competition seems much less intense in long distance than it was a few years ago. Competition in wireless phones and internet access is unfortunately intense. There is a risk of further union problems.
INSIDER TRADING: Checking transactions since April 1, there is not a lot of activity, some “purchases under a plan”, 3 executives exercised options and sold, although the CEO kept about one third of the stock acquired on option. Overall no clear signal emerges here.
WARREN BUFFETT’s TENETS: (See Robert Hagstrom’s book – The Warren Buffett Way) – Not simple to understand due to accounting and technology issues (fail), poor recent profit history, but recently improving sharply (marginal pass), Some prospects for above average returns as cash flows from customer base materialize (pass), apparently candid ethical management, but I don’t like the focus on non-GAAP EBITDA (marginal pass), not a high ROE recently (fail), reasonable high profits on sales, particularly high gross profit (pass) , not a low debt ratio (fail), little chance of permanent loss of capital (pass) probably low level of maintenance type capital spending required to maintain existing operations excluding growth (pass) and arguably selling at a discount to intrinsic value (pass).
VALUE AND GROWTH RATIOS: Price to book value appears attractive at 1.5. But price to tangible book value is negative. Dividend yield is moderate at 2.1%. The P/E ratio based on interim earnings does not seem excessive, given the earnings growth trend, at 22.9. Revenue per share has declined in recent yeas due to share issues. Return on equity based on core earnings is unacceptably poor at about 6.5% but is now improving rapidly. Overall I find that these ratios, in isolation point to Hold.
Symbol and Exchange: T, TO
Currency: Canadian $
Category: Growth
Latest four quarters annual sales $ millions: $7,301.2
Latest four quarters annual earnings $ millions: $435.5
P/E ratio based on latest four quarters earnings: 22.9
Latest four quarters annual earnings, adjusted, $ millions: $435.5
BASIS OR SOURCE OF ADJUSTED EARNINGS: Management sometimes reports “cash or core earnings” before amortization of goodwill, restructuring costs and any extraordinary items. However, given the plethora of confusing adjustments, prefer to focus on GAAP earnings at this time.
Quality of Earnings Measurement and Persistence: It’s hard to know if the depreciation expense (on a net present value basis) is a good approximation of the need to replace assets as they wear out and become obsolescent. Depreciation may be over-stated as it recently exceeds capital spending, this adds to earnings quality. Currently the company is expensing mobile phone customer acquisition costs of $381 per customer. On an after tax basis this adds perhaps $100 million to expenses compared to amortizing these costs (from this year and previous years). Pension expenses appear to be under-stated.
P/E ratio based on latest four quarters earnings, adjusted 22.9
Latest fiscal year annual earnings: $320.9
P/E ratio based on latest fiscal year earnings: 31.1
Fiscal earnings adjusted: $320.9
P/E ratio for fiscal earnings adjusted: 31.1
Latest four quarters profit as percent of sales 6.0%
Dividend Yield: 2.1%
Price / Sales Ratio 1.37
Price to (diluted) book value ratio: 1.51
Quality of Assets and Book Value Measurement: Poor, book value cannot be trusted because it would be negative if intangibles and goodwill are removed. Also the market value of the debt significantly exceeds the book value of debt.
Number of Diluted common shares in millions: 360.1
Market Capitalization $ millions: $10,082.8
Percentage of assets supported by common equity: (remainder is debt or other liabilities) 38%
Current assets / current liabilities: 0.9
Liquidity and capital structure: Only fair with a significant debt level, but recently improving rapidly.
Latest four quarters adjusted (if applicable) net income return on ending equity: 6.5%
Latest fiscal year adjusted (if applicable) net income return on average equity: 5.1%
Adjusted (if applicable) latest four quarters return on market capitalization: 4.3%
5 years compounded growth in sales/share -3.8%
Volatility of sales growth per share: Recently negative
5 Years compounded growth in earnings/share 27.8%
5 years compounded growth in adjusted earnings per share -13.1%
Volatility of earnings growth: Volatile
Projected current year earnings $millions: $504.1
Projected price to earnings ratio: 20.0
Over the last five years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in earnings per share? No
Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: 2.6%
More conservative estimate of compounded growth in earnings per share over the forecast period: No prediction
More optimistic estimate of compounded growth in earnings per share over the forecast period: No prediction
OUTLOOK FOR BUSINESS: It appears that profits will rise in future due to continued strong growth in the subscriber base. Gross margins on wireless appear quite high and that will lead to higher profits as customer acquisition costs become a lower percentage of revenue, due to growth. There is a loss of earnings in long distance and a slow erosion of traditional land lines. Overall, I expect cash flows and earnings to increase as new customer spending becomes a smaller portion of the customer base.
Estimated present value per share: Given recent volatility and low, albeit improving, earnings, it is impossible for me to value the company based on an earnings growth projection.
INDUSTRY ATTRACTIVENESS: (These comments reflect the industry rather than any particular company.) Michael Porter of Harvard argues that attractive industries are those that are relatively protected from competition based on 5 key tests or forces. Has at least moderate barriers to entry since all competitors require extensive high cost networks. There are no issues with powerful suppliers or customers who could usurp industry profits. There is no issue with substitute products for the industry as a whole. (though phone competes with cable and satellite). Unfortunately high cost infrastructure businesses often suffer from severe price competition. It is a high growth industry. It is also high risk. New technologies can quickly lead to write-offs in the old technology. Once acquired, customers tend to represent ongoing monthly revenue. This is a very positive feature of the industry. Overall, the industry is moderately attractive but is risky.
COMPETITIVE ADVANTAGE: Near -monopoly position in regulated local service. The incumbent position in Alberta and B.C. gives it an advantage in selling internet access lines. Has build up a huge base of cellular customers.
ACCOUNTING AND DISCLOSURE ISSUES: Disclosure is in most ways exceptionally good. I very much liked that the company discloses its future earnings estimate. I also very much like that the company discloses earnings per share before unusual in the six year statistics. (Annoyingly the practice of giving adjusted earnings seems to have stopped). The quarterly report is exceedingly detailed but I find that it is all chopped up into detailed parts and I can’t easily see the overall earnings adjusted for all the unusual items discussed.
COMMON SHARE STRUCTURE USED: Normal, 1 vote per common share. There is also a class of participating non-voting “common shares” which are included as common shares in our analysis.
MANAGEMENT QUALITY: This management frustrates me. In general management is able to execute its operating strategy. But, this company focuses on revenue and EBITDA growth, rather than on net earnings or adjusted earnings per share. Measuring performance before interest, taxes and depreciation makes little sense to me. Their mistake in over-paying for spectrum license became apparent in write-offs, but they don’t admit their mistakes. The outlook has improved significantly lately.

DISCLAIMER: The information presented is not a recommendation to buy or sell any security. The author is not a registered investment advisor and the information presented is not to be considered investment advice. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision.

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