2023-04-25 05:56:37 ET
Summary
- Fears of a recession, rising interest rates, and inflation have affected every publicly traded business on the TSX, creating a bear market.
- BCE stock has fallen more than other telecommunications and utility equities due to inflation's impact on the company's profitability.
- However, given its strong fundamentals, BCE has up-and-coming prospects despite these temporary headwinds.
Investment Thesis
Fears of a recession, rising interest rates, and inflation have affected every publicly traded business on the TSX, creating a bear market. Valuations have fallen across the board, even for industry heavyweights like BCE Inc. (BCE). Canada's most extensive telecom stock, at $47.59 per share as of this writing, is down 18.17% year-over-year.
Although telecommunications and utility stocks tend to trade at lower multiples when interest rates are high, BCE stock has experienced a more severe decline due to inflation's effect on the company's profitability. However, despite these temporary headwinds, BCE has up-and-coming prospects, given its strong fundamentals, such as its rural expansion in Manitoba geared towards giving customers a greater experience. Additionally, it has a very promising partnership with Palo Alto. Its CAPEX and fiscal growth is also worth noting.
Although these factors are very promising, the company isn't a flawless investment as it has its share of risk, which I find bound in the dividend volatility and high debt levels. Given this background, I rate the company a buy, but investors should move cautiously because of the inherent risks.
Manitoba Expansion: Enhancing Customer Experience
Bell MTS, a wholly owned subsidiary of BCE Inc., planned to invest in broadband infrastructure across Manitoba, bringing residents new investment and job opportunities. East St. Paul, Gimli, Headingley, Ste. Anne, Teulon, and West St. Paul are just some of the Manitoba towns to which the company intends to bring its high-speed Internet service soon.
This expansion program will make high-capacity fiber links with download speeds of up to 1.5 Gbps available. Since 2017, the company has put more than $1.3 billion into rolling out its broadband fiber, 5G, and wireless home Internet networks in Manitoba. The program's goal is to connect areas that are hard to reach and close the connectivity gap. Customers in more than 60 rural and remote areas have used the company's wireless home Internet service to connect to fast and stable broadband.
Also, the firm has spent almost $400 million laying down high-capacity fiber links throughout Winnipeg. Thanks to this, more than half of all households and businesses are now reachable by the corporation. Bringing faster Internet speeds and mobile technology to Atlantic Canada will significantly help the area and improve things for people. A better CX leads to more satisfied customers, boosting your profit margins.
BCE-Palo Alto Partnership
Bell, a division of BCE Inc., has collaborated with Palo Alto Networks to introduce two CNAPP solutions to bolster cloud security for Canadian businesses. Bell, a division of BCE Inc, has teamed with Palo Alto Networks to introduce two CNAPP solutions to bolster cloud security for Canadian businesses.
BCE pointed out that Bell is the only company in Canada that can give managed CNAPP security in partnership with Palo Alto Networks by using Palo Alto Networks' Prisma Cloud. In my view, this situation gives them an upper hand in terms of competition. The CSPA analyzes a company's cloud resources and identifies any vulnerability in its protection. The service connects to all cloud platforms, where it may search for assets, determine their configuration details, and evaluate those details in light of customer-specified criteria and the Cloud Security Alliance's Cloud Controls Matrix. Improvement suggestions and security configuration and standards compliance gaps are detailed in a report.
These solutions provide real-time monitoring and an emphasis on protection to safeguard better business data stored in the cloud. The collaboration's overarching goal is to ease the transition of corporate data to the public cloud and mitigate problems with data security and setup. Bell will provide services to address these issues and use individual insights gleaned from Palo Alto Networks' evaluation software.
Bell will benefit from the rising demand for cybersecurity solutions. According to a survey from Fortune Business Insights, the global cybersecurity industry is anticipated to increase by 13.4% CAGR from $155.83 billion in 2022 to $376.32 billion in 2029. With these numbers and the partnership, I think BCE's future is well-founded and poised to produce significant returns for the business and investors.
What Else Apart From The Above Growth Initiatives?
In addition to the above customer-focused growth measures, I applaud the company's capital expenditure and financial expansion, which I believe will keep paying in the long run. BCE is Canada's top telecommunications company. It has the largest network of its competitors and continues to improve its infrastructure by investing cash. The company's plan for spending on capital has been raised. The Telco giant plans to spend around $14 billion on network changes to be the best telecom company in the country. It plans to put that much money into business between 2022 and 2024.
BCE reported $24 billion in sales in 2022, an increase of 3% from the previous year. Its net income rose 1% within the same time frame to $2.9 billion. The company's free cash flow has decreased over the past two years due to raising capital expenditure. However, if its investments start to pay off in the following years, the current decline in free cash flow could lead to a sizable increase.
Signs That Its Investment Is Paying Off
The capital expenditure plan may have reduced free cash flow, but the company sees positive returns on its expenditures to upgrade its infrastructure. Postpaid cellular subscribers have increased substantially at BCE during the past few years. It also reported a 3% average revenue per user increase in 2022. It had a greater average revenue per user than its main competitors.
In particular, its Q4 broadband customer base grew by 330,743 total net activations, which included 122,621 postpaid and prepaid mobile phones, 104,447 mobile linked devices, 63,466 retail Internet, and 40,209 IPTV, an increase of 46.6%. This customer increase came alongside other financial growth data, which I expect to improve more due to the company's expansion activities.
Balance sheet Analysis
As of the 31st of December in 2022, BCE owed $11.4b within a year and $34.2b beyond that. In contrast, it had cash of $733.0m and receivables of $4.20b due within a year. Therefore, the company's liabilities were $40.6b higher than its cash and short-term receivables.
This is a huge debt even compared to its market valuation of $56.2b. Shareholders could risk significant dilution if lenders require the company to strengthen its balance sheet. In terms of coverage, With an EBITDA to the interest expense ratio of 3.5, BCE was able to pay for its interest payments with its earnings. This indicates that the debt levels are high enough to be noticeable but not so high as to be a serious concern. By December 2022, it has had a 4.1% year-over-year increase in EBIT. While that isn't exactly ground-breaking, it is good regarding debt.
Hard cash, not accounting for profits, can pay off a company's debts. The next step is determining how much of that EBIT is matched by real free cash flow. Over the past three years, BCE's free cash flow was worth 52% of its EBIT, which is about average since interest and taxes are not included in free cash flow. With this hard cash, it can pay down its loan whenever it wants.
However, the corporation had $31.5 billion in debt at year's end, up from $29.1 billion a year earlier. Its net debt was $30.7b due to the fact that it also had $733.0m in cash. The ratio of BCE's net debt to EBITDA and the size of its total liabilities were depressing. However, it does a decent job translating EBIT to free cash flow. Investors should keep a close eye on the rowing debt, as too much debt can be damaging to the firm despite any encouraging indicators that its capex is paying off.
Conclusion
Despite the harsh macroeconomic backdrop that has been adverse for BCE, the company has good fundamentals that will trigger its long-term growth. With all its client-centered growth strategies aimed toward improving customer experience, the company has garnered strong customer growth, which I hope to continue in the long term. The expanding number of its client base, which is quite promising considering the growing demand for its offerings, bodes well for the company's future top and bottom lines.
With the company seeing indicators that its CAPEX is paying off, it's exciting to see it ramping up its CAPEX. Its significant financial leverage, which I consider both advantageous, bodes well for the company as it can easily finance its capex and other financial obligations. However, investors should keep a close eye on the expanding debt since it can be very detrimental if it exceeds its capacity to cover it by cashflows and EBIT. Considering the information in this article, I rate the company a buy but move cautiously.
For further details see:
BCE: Signs That CAPEX Is Paying Off Justifies More Expenditure