BCE's dull but steady phone business only worth so much (gam)
Dave Ebner
BCE Inc. stock, down almost a third in four weeks, is suffering a brutal comedown from a two-year run during which the Montreal-based conglomerate was valued as a nimble, aggressive growth company. That rosy view is fading by the day -- and the stock's valuation is likely to fall further.
For years, despite occasional forays into other lines of business, BCE was Bell Canada, a monopoly that produced reliable and slow-growing profit. And it was valued on that basis, garnering a single-digit trailing price-earnings multiple through most of the 1990s.
Then came the New Economy, the stock market bubble and a massive boom in the telecommunications business. Shares of telcos around the world soared. In six short months, from September, 1999, to March the following year, BCE stock almost tripled, reaching an record high of $47.37 on March 27, 2000, one trading session after the U.S. stock market hit its zenith.
Valuation was reasonable -- in the mid-teens -- for a while, even through the first huge jump, supported by profit from Nortel Networks Corp. But BCE sold its stake in the now moribund network equipment maker a couple months later and, by the start of 2001, BCE stock was valued at more than 40 times trailing profit.
When the market accords a juicy growth multiple to a company, expectations are obviously high. Any hint of slowing growth can send investors fleeing, which is what's happened in the past month. Though BCE stock stumbled somewhat last year, the greater realization that its growth strategies had failed only emerged recently.
"People are starting to readjust their expectations," said Lawrence Surtees, a long-time BCE watcher and telecom analyst at IDC Canada Ltd., a research firm in Toronto. Looking back on the boom, Mr. Surtees said "those days are gone."
For BCE and its North American peers, Mr. Surtees sees a distinct trend back to the basics, a focus on core assets, those being reliable -- though slow-growing -- local telephone businesses. "These guys are moving back to their roots."
Mr. Surtees estimated long-term BCE profit growth of 7 per cent -- staid yet dependable. According to data provider Multex.com Inc., even analysts -- a generally positive bunch -- aren't predicting much more. From a $1.57-a-share profit in 2001 to estimates of $1.82 in 2003 and $1.98 in 2004, growth averages 8 per cent a year.
How much is such profit and growth worth? Looking beyond the telco industry, Royal Bank of Canada is expected to increase profit by 12 per cent this year and next. It trades at 16 times trailing profit. If BCE is going to grow at three-quarters the rate of Royal Bank, then perhaps a multiple of 12 times trailing profit is fair.
Twelve times $1.82, the 2003 estimate, is $21.84, 9 per cent lower than $23.90, BCE's close yesterday on the Toronto Stock Exchange.
It's hard to make the case for a higher valuation. Major U.S. telcos, including SBC Communications Inc. and BellSouth Corp., don't merit much more now at about 14 times trailing profit, and both those companies are looking at single-digit profit growth in coming years.
And, remember, $1.82 a share next year is only an estimate. BCE faces an imposing list of problems, including significant debt -- recently downgraded to junk -- at its Teleglobe unit. Less clear but more worrisome is the possibility it will be forced to ante up more than $5-billion in the second half of this year to buy back a stake in Bell Canada it sold three years ago.
All told, BCE stock shows no sign of an immediate turnaround. Looking at the company in perspective, BCE is still Bell Canada. A dull but reliable telephone business is only worth so much. |
